Section 166(a) of the tax code says that "there shall be allowed as a deduction any debt which becomes wholly worthless within the taxable year." However, in the case of a guarantor of another party's debt, a special set of rules operates to determine the time such guarantor is entitled to a "bad debt" deduction (once the guarantor honors the obligation to the creditor).
Sec. 1.166-1 Bad debts.
(a) Allowance of deduction. Section 166 provides that, in computing
taxable income under section 63, a deduction shall be allowed in respect
of bad debts owed to the taxpayer. For this purpose, bad debts shall,
subject to the provisions of section 166 and the regulations thereunder,
be taken into account either as--
(1) A deduction in respect of debts which become worthless in whole
or in part; or as
(2) A deduction for a reasonable addition to a reserve for bad
debts.
The following case study is very useful :
ISSUES
1. What steps are necessary to record or memorialize the assignment of a loan
(or loan portion) as a loss asset for purposes of the conformity method of accounting
for worthless bad debts?
2. Does the conclusive presumption of worthlessness under the conformity
method apply to loans erroneously classified as loss assets?
FACTS
ABC corporation is a bank (as defined in 1.166-2(d)(4)(i) of the Income Tax
Regulations) and is subject to supervision by Federal authorities. ABC has elected
under 1.166-2(d)(3) to use the conformity method of accounting to determine when
debts owed to ABC become worthless bad debts.
Under a resolution adopted by ABCs board of directors, ABCs officers and
employees are authorized to charge off loans (or portions of loans) only when the
charge-off is required under the loan loss classification standards issued by the banks
supervisory authority. Thus, when ABCs officers and employees charge off a loan for
regulatory purposes, they do not take any additional steps to record or memorialize
whether, in their judgment, the charge-off is required by the loan loss standards that
have been issued by ABCs supervisory authority.
The loan loss standards require ABC to charge off loss assets. Loss assets
are loans (or portions of loans) determined to be uncollectible and of such little value
that their continuance as bankable assets is not warranted. In the case of a consumer
loan or credit card debt, regardless whether there is specific adverse information about
the borrower, ABC is required to charge off the asset when its delinquency exceeds
certain established thresholds.
...ancial positions of the borrowers, their lack of knowledge as well as the superior bargaining power of the lender to get the borrowers to agree to these loans. The lenders should bear the major responsibility of these loans, as they are aware of the ramifications of such transactions. The borrowers are also responsible, as they should not enter into contracts without adequately understanding the consequences of such actions. In many cases, the lenders do not provide the information that would assist the borrower in making rational decisions. There are instances when the borrower does not care about the increased penalties, they just want to get their hands on the money, and worry about the consequences later. Some borrowers just live beyond their means but once they get sucked into a predatory loan, they begin a cycle of debt that they just cannot get out of.
other over borrowers face is that when they are faced with unforeseeable events and financial
loans in 1920 would easily be able to pay these off now - leaving them
...ve a debt to owe to immoral or unjust laws that harm other people or
Does Bankruptcy Stop the Collection of Student Loans? | Nolo.com. (n.d.). Nolo.com. Retrieved April 29, 2014, from http://www.nolo.com/legal-encyclopedia/does-bankruptcy-stop-the-collection-student-loans.html
...They also have the option of Deferment or Forbearance, and also the option to see if they qualify for Forgiveness, Cancellation, or Discharge. They are options available for borrowers instead of going into Default.
There are many ethical issues involved. SC State is saying that the debt has been building up over a period of time. That could possibly
Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards No. 86. Norwalk. Retrieved April 7, 2014, from http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175820922177&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=189998&blobheadervalue1=filename%3Dfas86.pdf&blobcol=url
John R. Roberts, a bankruptcy attorney, states that "bankruptcy is nothing more than a fresh financial start. It is designed to help those who are in debt beyond a reasonable means to pay" (online). This is only if the person in debt didn't get there through anything dishonest. People get in debt for a number of things like losing their job, accidents, and business failure. When that happens people have different options of bankruptcy or different sections of the banckruptcy ammendment to choose from. The most common is Chapter Seven. This section allows you to sell some of your assets to clear as much of the debt as possible. In most cases, it also permits you to keep your property. Chapter 13 is for those who are temporarily in debt. It helps to set up payments that are reasonable for the debtor. (online) Bankruptcy is a way for a person to regain their life. After getting so far in debt some people have no way out.
...hat because they put in, they were able to “take out”. This is the same with insurance. You don’t see or know the actual carrier, you just buy a policy from an insurance company. Your premiums are paid every month, just as you promised, with the understanding should tragedy or when tragedy strikes, the carrier will be there to help you out. The individual is putting their faith into the insurance carrier. They are believing that because they were diligent and devoted, the carrier will “reward” them with monetary assistance. In this world of uncertainty we can be certain of one thing, and that is change. It is coming in many forms daily. Therefore it is best to be educated on the options available to sail right past the change, and to have faith in the decisions you make regarding the safety net you may, or may not choose in the event of death, tragedy, or illness.
Life & Debt The documentary Life and Debt portrays a true example of the impact economic globalization can have on a developing country. When most Americans think about Jamaica, we think about the beautiful beaches, warm weather, and friendly people that make it a fabulous vacation spot. This movie shows the place in a different light, by showing a pressing problem of debt. The everyday survival of many Jamaicans is based on the economic decisions of the United States and other powerful foreign countries.
“If you owe your bank a hundred pounds, you have a problem; but if you owe it a million, it has.(1)”
The study defines “default” as a risk to the repayment history of borrowers where the borrowers have missed at least three installments in 24 months. This shows a symbol and indication of borrower behavior that will actually default to cease all repayments. This definition does not mean that the borrower had entirely stopped paying the loan and therefore been referred to collection or legal processes; or from an accounting perspective that the loan had been classified as bad or doubtful, or actually written-off (Pearson & Greeff, 2006). While, McMillion (2004) states that default is the risk where the borrower is unable to pay the loans. Default risk increases if a borrower has a large number of liabilities and poor cash flow.
Mortgages, car loans, student loans, and having children, are all situations that can drive families to the overwhelming doom of debt. Debt is mostly overlooked for the simple reason that it may be considered normal. Certain types of debt like car and mortgage payments are almost expected. Debt is sometimes very difficult to evade, especially if money is not managed sensibly. Many families accumulate debt due to overspending, medical bills, and unemployment.
In today’s world young people are using debt to live what they think is the easy life, buying unnecessary items to keep up with the latest trends, partying, and switching from credit card to credit card to pay off racked up bills. In my opinion young people lack the knowledge, and understanding of how credit works, and what it takes to keep up with the responsibilities of owning a credit card. Another reason young people are getting into debt is from college loans. Some students jump from school to school unsure of what career they want to pursue, and some jump from school to school using financial aid to obtain the luxuries they couldn’t normally afford. I think the biggest reason of all for the debt accrued in the early years of adulthood though is irresponsibility. Young people get into debt because they lack knowledge, have many student loans, and are irresponsible when it comes to handling debt.