What if travel company fails?

[Deleted]

I hope this will remain theoretical, but....

In March of 2020 my trip to South America was curtailed due to emerging concerns over COVID and we were sent home.  This tour was to include Macchu Picchu and the Galapagos so it was a big-ticket trip.  The tour company is based in Massachusetts and state law REQUIRES them to give cash refunds if the customer requests them.  I really like this company and want to support them so accepted a credit of about $6,000.  I wrote them a letter to that effect.  

I've booked two tours with them that will use up the credit (and then some).  The earlier one leaves 6/26 for Eastern Europe and I should be fully vaccinated by then (getting first shot this AM, second already scheduled) so I hope to make it.

If the travel agency goes belly-up are these credits deductible as bad debts?  I really did loan them my money in accepting a credit even though there's no official loan document.

[laterbloomer]

The company I booked my trip to China with went bankrupt. I got a full refund through my Avion Visa and they dealt with the company. I remember the agent I was talking to telling me I was the 17th person he personally had talked to that day about the same thing, and his coworkers were all in the same boat.

[TheOtherMe]

Non business bad debts    www.irs.gov/taxtopics/tc453


Nonbusiness Bad Debts - All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.



A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt. It's 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 don't have to wait until a debt is due to determine that it's worthless.



Report a nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It's subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless.

[Deleted]

I don't think the credit card company will help me and that's OK- I voluntarily relinquished my right to a cash refund.

TheOtherMe, I read that and to me it appears to be a non-business debt. Do you think the IRS would agree?

[TheOtherMe]

That would be my interpretation. The company would need to declare bankruptcy.

Your bad debt would be limited to the amount you actually paid (some companies gave bonus credits)

[rangerj]

The amount of the loss has to be "fixed and determinable" in order to be deductible as a nonbusiness bad debt. AND, you would have to have taken all legal actions in an effort to recover from the company, or the Bankruptcy Court has processed their bankruptcy case and there are not assets from which you can recover all or part of you loss. So if the Bankruptcy Court decides that you are going to get $100, then your loss is now "fixed and determinable" at the amount in excess of $100. The deduction would be in the year the amount of the loss becomes "fixed and determinable".