When filing your taxes each year, the IRS allows you a deduction for bad debt. Now, this doesn't mean your bad debt; it means debt owed to you. Perhaps you made a loan to a colleague to help her start her small business, but then she had to file for bankruptcy. Or lent some cash to a friend who needed it to pay his rent, but this so-called "friend" disappeared and you never heard from him again.
That's bad debt, because you'll never get that money back. Bad debt is a debt that is uncollectable. Unfortunately, the money is gone forever. Fortunately, Uncle Sam will help you out by letting you deduct that lost money on your taxes. But, as with everything regarding taxes, the government needs you to meet certain requirements before you can take this deduction.
On the next few pages, we'll explain the ins and outs of bad debt, and how to properly deduct it from your taxes.