How to you get good friends to honor a debt?
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My wife made a couple of loans to friends roughly 10 years ago. They were having trouble making ends meet. I was not in favor of loaning money to friends, but my wife felt that the situation warranted it. The total of the agreed loans was around $15,000, not including the accrued interest at an agreed-upon 5% rate. I think that about $3,500 has been paid back on the loan with interest.
Things have stabilized for the friends and they’ve gotten back on their feet, but paying back the loans will still be a challenge for them. They have worked to make some payments, but we have never had a consistent payment and have not pushed on the issue for about four years. My wife did get a notarized loan note associated with the first loan, but not the second.
She is more willing to consider this a bad debt to write off than I am, but I also realize that their challenge to repay will be far greater than our need for the money. I believe that they should make a reasonable effort to make payment on the principal, and we would consider the remainder as bad debt and put this behind us. I would love to conclude this before the end of this year, one way or another.
My questions are: How would you recommend approaching them (and my wife) on the issue in order to come to resolution? I am willing to forego the interest, but I think that it is more than fair to expect repayment of principal. Assuming that some of the loan will be written off as bad debt, what do I need to do to document a bad debt write-off on my taxes?