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Unpaid Debt and Tax Consequences

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What are Some Tax Consequences of Unpaid Debt?

Unpaid debt can lead to an array of tax consequences.  The nature of the consequence will often depend on the type of debt at issue.  In general, if the unpaid money is actually tax money that is owed to the government, it can have negative effects on the defaulting party.   For example, unpaid tax debt on a property can lead to a tax lien, which may allow the property to be seized and sold in order to meet the tax debt. 

When a person is owed debt, but the other person doesn’t pay, it can actually lead to some tax deductions for the lender.  This is known as “bad debt deduction”.

What is a Bad Debt Deduction?

A bad debt deduction is basically a form of tax relief for instances where a lender loans some money, but the borrower fails to pay them back.  The bad debt deduction allows the lender to make a special type of deduction in order to provide some offset for their income.

Bad debt deductions come in two types, business bad debts and non-business bad debts.  There are differences with regards to the filing and eligibility requirements for each of these categories.  However, business bad debts are generally treated more favorably than non-business bad debts.  Non-business bad debts can often be of a more personal and informal matter. 

What if I Have Issues With Unpaid Debt?

Unpaid debt can sometimes be a problem, but it doesn’t always have to result in negative tax consequences.  For instance, discharging tax debts through bankruptcy is sometimes an option.  This can help prevent a lien being placed on the person’s property.  Unpaid debt is a problem that often arises. Fortunately, there is usually some options available to the debtor to at least lessen the burden of the debt in some way.

Do I need a Lawyer for Help with Unpaid Debt and Tax Consequences?

Debt and tax issues can often be very complicated to resolve.  You may need to hire a lawyer if you have any questions or concerns with any of these types of legal issues.  Your attorney can provide you with the legal advice needed for your particular situation.  Also, if you need to file a claim, your lawyer can help represent you in court during formal hearings.  

Photo of page author Jose Rivera

, LegalMatch Legal Writer

Last Modified: 06-25-2018 01:51 AM PDT

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