- December 9, 2023
- Posted by: legaleseblogger
- Category: Related News
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AI LEGALESE DECODER: A HELPING HAND IN LEGAL UNCERTAINTY
Loan Agreement Fallout: A Case of Financial Turmoil
The Interest Reload: The Unraveling of a $125k House Flip Loan Contract
After entering into a loan agreement for a house-flipping venture with an acquaintance, a series of unforeseen financial disasters have left the lender, to his chagrin, burdened with a tumultuous debt scenario. The agreement, carefully stipulating obligations and duties, has now become the center of legal ambiguity due to the borrowerÔÇÖs insolvency.
The Depths of Financial Turbulence: A Drowning Investment
As the property, funded through the loan, plummets into negative equity and teeters on the brink of repossession by the bank, the borrower finds himself ensnared in a web of insurmountable debt. His financial standing is further exacerbated, as his meager earnings fall short of covering the monthly payments to primary creditors. In the wake of this fiscal maelstrom, the borrowerÔÇÖs reassurance of repayment dwindles, overshadowed by his mounting debts and the probable prospect of declaring bankruptcy.
Navigating the Legal Maze: Grappling with Enforceability and Tax Implications
In light of this precarious predicament, the lender is confronted with an array of perplexing legal issues. The enforceability of the borrower’s obligation to repay the loan, even in the event of bankruptcy, poses a vexing legal query. Compounded by such uncertainties, the lender is left grappling with the tax implications of the defaulted loan. Owing to the investment being earmarked for a business endeavor, the lender is confronted with the daunting task of discerning whether the ensuing loss would amount to a business default or a personal loan default, and the resultant impact on tax liabilities.
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Hope Amidst Uncertainty: The Perils of Post-Write-Off Repayment
Undoubtedly concerned with the prospect of never recouping the loan, the lender is left pondering the implications of a potential repayment by the borrower subsequent to the loan being written off for tax purposes. The specter of such a scenario looms, casting a shadow of uncertainty over the lender’s financial strategy and tax obligations.
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****** just grabbed a
[deleted]
How could he possibly loose hundreds of thousands on a house flip? Tens of thousands, yes. Hundreds of thousands, you need to try to screw it up that badly. Start looking into just what is going on here. Maybe heÔÇÖs not as far underwater as he thinks.
I think you likely need to talk to a professional and/or lawyer. You loaned money to this friend for the same house that had some sort of a mortgage? Now, the bank is taking the house due to missed payments? There are many questions/considerations here, but:
1. I’m hoping he disclosed to this bank that part of the down payment was a loan from somewhere else, or he committed fraud to get the bank loan.
2. If he did disclose this, and was able to obtain a mortgage through the bank, the bank is likely first in line for collecting any proceeds on a default. It sounds like you know this already, since you don’t really hope to collect anything.
3. In your loan agreement/contract, are you charging interest? If this is the United States, there is a minimum interest rate required, or else this may be treated as a gift.
4. It sounds like this was set up as a loan, but if this was a partnership and you were to share profits/losses, things would be a lot different, too. I don’t think this is the case, because it seems you set it up to just lend money and not be involved in the flip itself.
Due to the large amount of money, I suggest engaging an actual in person lawyer or tax professional to understand details.
Talk to an attorney.
Bad debt on a personal loan can be written off as a short term loss. If you write it off, you can’t collect on it later. It has to be 100% guaranteed that the loan is unrecoverable. It also counts as income to your friend and it will trigger a tax liability for them. Make sure you understand all of the requirements that go with this, and save all documentation.
Over bid/pay in a frenzy market.
Held too long.
Held during property tax payment.
Overspent on material and finishes over what the market would compensate.
Forget that pesky interest rate #.
I also loaned a friend 20k to start a pot farm 12 years ago. He eventually fled the country to escape all the debt he owes people and is now in the Philippines.
How much cash do you have to piss away if you make a $125k loan and not bother to spend a couple thousand on an attorney to help protect that investment?
You need to talk to a tax accountant. There are specific laws governing the characterization of loans. Also, there may be a state tax impact. This is beyond the scope of r/personalfinance. You already screwed up once; don’t make it twice.
Talk to a tax professional. If you can afford to loan your buddy $150k without bothering to obtain any insight into the financial affairs of his operation, you can afford to hire an accountant to figure out the best way to handle the situation from a tax perspective.
If you wrote the loan to him and not a business entity he own, it’s a personal loan. You lent your after tax money to a friend, there’s no tax implication there. You will need to consult lawyer to see if your pay back clause is enforceable.
You can’t contract away your right to discharge a debt in bankruptcy so that isn’t going to save you.
https://www.irs.gov/taxtopics/tc453
People in money trouble are like a drowning person. If you try to help them, there’s a good chance you go down with them.
Repayment will be heavily dependent on your written agreement. If you do not have one, you’ll likely have to accept the loss and move on. I’ve only had a few people that didn’t pay money owed and it was never recovered. Granted it was a few thousand not 100k+. If you are lenient and show understanding, the likelihood is you will not be repaid and if he has any intention to, you will be the last on the list. Claim the loss – expect to never see the money and if somehow a miracle happens and you are repaid just hire an accountant to handle it. Accountants are cheap to hire.
I feel like if youÔÇÖre in a position to loan over $100k you should also have a lawyer/accountant you should be asking these questions
You may be able to claim the loss as [short-term capital losses.](https://www.fool.com/the-ascent/taxes/articles/loaned-a-friend-money-they-never-paid-back-it-could-serve-as-a-tax-break/)
Guarantee you . His flip renovations cost him 2 to 2.5 what he predicted. ThatÔÇÖs what got him
I would sell the debt to a collector for small amount (you’d probably get only a few dollars), and then write off the difference as a capital loss on Schedule D.
Tax note: Only $3000 per year of net capital losses are allowed to offset “regular” income. So, unless you have capital gains, it will take many years of tax returns to fully write off your loss.
PS: Also, your friend’s promise to pay even if he goes bankrupt is not legally enforceable. The debt will get wiped out in bankruptcy no matter what your note says. If friend so chose, he could pay you back post-bankruptcy, but there would be no legal requirement for him to do so.
General disclaimer: Everyone’s financial situation is different. Seek the advice of a competent financial advisor before implementing a strategy such as the above.
Your contact won’t survive bankruptcy. He can choose to repay you, though.
You can claim the loan as loss on your taxes. You’ll be able to carry that for a couple of years, depending on your tax liability.
Seriously, though, if a loan could survive bankruptcy simply by adding that language, all loans would be unbankruptable.
Could OP put a lien on the house?
It sounds like your friend might have committed mortgage fraud unless the house was paid all in cash.
Typically large sums of money that are unexplained need to be written off as a “gift” from someone where they are stating it is not a loan and have no expectation of repayment. I highly doubt your friend supplied an accurate letter to the mortgage lender if they did indeed get a mortgage for the house. If they paid all cash they swindled you, house can be underwater but there should still be equity unless it got destroyed.
It’s not an income, so why would taxes be involved?
You loaned a friend money, granted it’s a very large amount, but I wasn’t aware it could be taxed.
Edit: I can’t help with your answer, I’m curious also.
IÔÇÖm hoping you have a contract with repayment plan specified. If so, talk with an accountant on how to deal with the loss on your taxes. This is beyond a simple Reddit question.
Very simply, Reddit is not the place to get answers. You need a bankruptcy lawyer to review literally every aspect of his specific finances.
My uninformed *guess* is that join the back of the line behind the other creditors waiting a fraction of the liquidation proceeds, but, again – I literally know nothing of your specific situation.
Yikes. That’s a lot of money to probably never see again.
I think you are best to talk to a real estate lawyer and accountant.
The tragedy of wealthy people losing money by investing in a housing crisis strikes again!
OPs name does NOT check out ƒñú seriously sucks, not the money but losing the friendship
So itÔÇÖs in one place, your friend has:
$2.7 million mortgage on the house
$400k in personal loans for renovations
$200k in personal credit card debt
$125k loan from you
$0 in cash and assets
$??? Unsecured debt from other friends
And he spent his pool of years of flipping houses on the down payment.
And youÔÇÖve been lending him money for 10 years. Incredible it took this long to collapse.
OP you make $450k a year. Live poor for a year, read the wiki page about lending and co-signing loans, forgive the debt, and never do this again.
You didnÔÇÖt loan any money. You got robbed.
You can talk to a tax pro, but at best this sounds like maybe a capital loss on an ÔÇ£investment.ÔÇØ Your paper work would probably be sketchy as hell considering the property in question isnÔÇÖt in your name.
I think it would be a stretch to say you were ÔÇ£actively participating.ÔÇØ
Talk to a tax pro.
I was a mortgage broker in NY for 10 years. Flipping properties was a way I invested the profit from my branches and made investors money. The best bet would be to contact the lender who is holding first lean position. Since it’s your money at stake you should definitely be involved in the process. You can negotiate a short sale on the property directly. More often then not they will negotiate cents on the dollar. For example if first lean position is owed 130,000 , I would offer 75,000. You can personally secure a loan and get it out of foreclosure. If it foreclose’s your money is gone. If you can complete the short sale , you can descide to rent the property out. Or if there is any equity at all , sell and get rid of the headache. Best of luck, I know it’s a stressful situation. The valuable lesson here is money and friends don’t usually mix. There is a reason why you had the money to do something like this, and your friend had none. When the other person has no skin in the game it usually doesn’t work out.
IÔÇÖd never wanna loan more than 5k to a friend.
Just remember, when you are willing to loan to a friend you need to see that as if it is throw away money, because there are more than enough cases that has taught people not to loan large amounts to a friend or closed families.
I also donÔÇÖt really have an answer to this.
Is the money you loan out to your friend under a contract? And with details on how they are going to pay you back?
If you ever going to loan out large amount of money to a close friend, go through a third party and sign contracts to have them pay you back monthly/installments. Money is money, no hard feelings. No money is free money.
Edit:
If the loan was obtained for business purposes, such as real estate investment, it would typically be considered a business loan.
If the investment was undertaken as part of a business venture, the losses may be treated as business losses.
If your friend is unable to repay the loan, it could potentially lead to a loan default. Loan defaults can have serious consequences, including damage to credit scores and potential legal actions by the lender.
We also need to identify the type of business that involved in this scenario. Like was your friendÔÇÖs business investments/operations under an LLC?
And yeah youÔÇÖd probably have to ask a tax professional to answer your questions regarding your tax implications.
Im in a similar boat. I loaned a friend 10k to open a bar. 8 years ago and they’re on the verge of shutting their doors at all times. The guy is on food stamps now. I told him he should max out every credit card and bank loan to pay me back. If he has to declare bankruptcy then, maybe he’ll screw the banks out of money instead of a friend :/
In 2007 the warning bells were flippers getting wiped out…
WhoÔÇÖs in the senior position on the note? If itÔÇÖs you, foreclose, take the property back to recoup your loan.
If yourbhis best friend, help him collect. If you dint care about the bridge, burn it until he rebuilds it. If he doesn’t, then you’ll know where he sees you as a priority in his life. If this is the case, file paperwork like a lien If possible.. then hope he pays out. If you don’t need the 125k. Write it off.
You can write off the debt and deduct up to $3,000 a year as a short term capital loss and continue to roll the loss over into future years. Reference IRS Form 8949 for full information.
If it matters to you, the written off debt becomes taxable income for your friend.
Is his business incorporated? Does he have significant personal assets?
Do you and him have the resources to bail this out turning it into an income Property either renting it out or turning it into an Air-B-N-B?
Maybe you can hang on long enough to later flip the property? It’s better than flushing all that cash ƒÆ░ down the ƒÜ¢ƒ¬á
Assuming you never going to see a dime of this, then what you have here is a nonbusiness bad debt.
So, you need to show 1- that is was an actual personal loan – you have the document – check
2- that you handed over the money – cancelled check – check
3 – that it can’t be collected on – this is going to be your sticking point if he claims he somehow is going to pay you back. You may well have to wait for him to declare bankruptcy, but if he writes an email to you stating you aren’t going to get paid back…ever, then that works too.
So, at that point, it becomes a capital loss, which can offset capital gains, first short term, then long term, and it can be carried over.
Seems like you would have to have closure to start writing it off, and even then net losses are limited to 3k per year. Maybe you have stock or other gains which can help. I would think if he still owes you the money and it hasnt been closed I wouldnt think you could write any off. You do need tax advice though, even if he never pays you a dime, just so you can get the best deduction.