If I claim a bad debt, may I still pursue the debt and repay later?

Yes, by taking the bad debt loss you did not give up your right to pursue the debt. But if you collect, you'll have to claim it as taxable income.

___ Stu

Thanks. I appreciate the advice.

A positive judgment of what -- that you had a debt, or that it was a bad debt.

According to publication 535 and tax topic 453

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A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.

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I think lawyers not returning your emails is not definitive enough to conclude that the debt is worthless.

Maybe the correct thing to do here is to amend the prior year return to not claim the loss. If it was a personal loss you deducted it as a short term loss on Schedule D, and at most only $3,000 is deductible this year and the rest gets carried over to next year. I'm not clear on the years, but if you claimed the bad debt in 2005, then you may have to amend many years. There will be interest for each year -- that is interest from the time the return was filed to now. And there would be amended state and local returns too.

Alternatively, if you claimed a loss in prior years, you must claim a recovery. This is easier, and I doubt the IRS would ask questions.

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If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as ?Other income? on the appropriate business form or schedule.

See Recoveries in Publication 525 for more information.

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So if you claimed the loss on Schedule D, claim the gain on Schedule D. If you claimed the loss on Schedule C (for business losses) claim the gain on Schedule C.

Clearly he got a judgment against the person who owes the money.

That's good advice, and a better answer than I gave. It may well have been proper to determine the debt was not collectible in the earlier year, but it's really a judgment call.

___ Stu