Contractor misappropriated funds then filed for bankruptcy

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Contractor misappropriated funds then filed for bankruptcy

Amanda Grzywaczewski
Investor · NY · Member since 2025 · 7 posts · 4 votes

Im an out of state investor. I paid a contractor for a whole property reno - went significantly over budget and our 3 month timeline in now in month 8. This is someone I’ve known for a long time and trusted. He started getting dodgy and I started digging. As it turns out he was misappropriating the funds, not paying subcontractors and filed for bankruptcy. He has completely stopped responding at this point. I have 2 unfinished projects that I’ve paid him for. Now I have a property with 2 open building permits with subcontractors who have not been paid (a lot of money). I can not get a co therefor can’t sell or rent. Police told me that since the projects had been started it shows intent to do the work therefor they can’t draw up criminal charges. Lawyer says subcontractors can file mechanics liens and obviously I can’t go after my contractor civilly because of the bankruptcy filing. I’m out so much money and hemorrhaging. Does anyone have suggestions on where to go from here?

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
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    Amanda, that’s a brutal situation, especially after trusting someone you’ve known for a long time. I’d separate the legal recovery side from the financial and tax side and start documenting everything now. I’d preserve every contractor agreement, payment, invoice, permit, subcontractor bill, bank record, photo, and communication you have. With two unfinished projects, I’d also keep the records separated by property so you can establish exactly what was paid, what work was actually completed, and what remains unfinished.

    From the tax side, I wouldn’t assume the money you paid is simply a current deduction. Construction and improvement costs generally need to be capitalized into the property's basis, while the amounts that were misappropriated may require a separate analysis depending on the facts.

    I’d also document any insurance claim, bankruptcy proceeding, potential recovery from the contractor, or payments you may eventually receive, since those can affect the tax treatment and timing of any loss. For now, I'd focus on getting a good construction/bankruptcy attorney involved, securing the properties and permits, and building a clean project-by-project accounting of exactly where the money went. Once you have that picture, your CPA can determine how the different amounts should be treated.

    I know that doesn't solve the immediate mess, but don't let the financial records become another casualty of the contractor situation.
    Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

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  • Divin KanyamaBusiness Member
    Accountant · Seattle, WA · Member since 2025 · 433 posts · 177 votes
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    @Amanda Grzywaczewski That is an incredibly difficult situation, especially with two unfinished projects and carrying costs continuing to build. At this point, the priority is probably less about recovering everything immediately and more about stopping additional losses and getting the properties to a point where they can legally operate or be sold. It may be worth assembling one coordinated team: a construction attorney familiar with mechanic’s liens, a bankruptcy attorney who can evaluate any claim against the contractor’s estate and possible exceptions to discharge, and a local contractor or owner’s representative who can independently document the current condition and cost to complete.

    Secure the sites and gather every contract, invoice, payment record, bank transfer, text, email, permit, inspection report, lien waiver, and subcontractor contact. Notify the permitting authority that the original contractor is no longer involved and ask what is required to change contractors, close or transfer the permits, schedule inspections, and identify the minimum work needed for a certificate of occupancy. The attorney can help verify lien deadlines, required notices, licensing-board or contractor-recovery-fund options, insurance or bond coverage, and whether any payments can be traced or challenged rather than assuming the bankruptcy ends every possible avenue. It may also be useful to communicate with unpaid subcontractors through counsel and explore documented settlements tied to lien releases, while avoiding duplicate payments without legal review. Once the remaining scope is independently priced, the least damaging option may be to finish only the work needed for approval and stabilization before deciding whether to rent, refinance, or sell. This is well beyond a normal contractor dispute, so local legal and construction guidance matters, but creating a clear record and a cost-to-complete plan is the best place to start.

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