If a family member defaults on a loan, you have several options: Amend Your Estate Plan: Treat the unpaid loan as part of the borrower’s inheritance, reducing their share. Write off the Loan as a Bad Debt: If the loan is truly uncollectible, you may be able to claim a tax deduction for a non-business bad debt. Forgive the Loan: You can choose to forgive the loan as a one-time gift, but you'll need to report it on your taxes. The IRS requires you to make efforts to collect the debt before writing it off. While suing a family member might seem extreme, it's essential to consider the potential tax implications and your financial situation before deciding how to handle a loan default.