Bad Debts and Debt Cancellations

COVID-19 Update

If you are currently a lender or other creditor to individuals or other organizations, and in the current environment there is a risk that your borrowers or other debtors may be unable to repay loans or other debts to you, for tax purposes the unpaid debts may be treated as business bad debt or nonbusiness bad debt, which can affect whether the bad debt generates an ordinary loss or a capital loss for you. In turn, if you are currently indebted to others and the debts are canceled in whole or in part, for tax purposes the cancellation can trigger taxable income for you. 

How Manatt Can Help: Before parties determine whether to treat a debt as bad debt, or to have a debt canceled, they should consider the tax consequences that would arise from such determinations. Manatt’s tax practice regularly helps clients understand the consequences of bad debts and debt cancellations, the availability and application of special rules that may provide relief, and steps that may be taken to support the favorable treatment of a bad or canceled debt.

For More Information: Contact Jeffrey A. Mannisto, partner and leader, Manatt Tax, at jmannisto@manatt.com or 310.312.4212; Robert Duran, partner, Manatt Tax, at rduran@manatt.com or 310.312.4274; or Scott Johnson, counsel, Manatt Tax, at sbjohnson@manatt.com or 415.291.7428.

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