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 · 8 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 · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    3w

    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 · 660 posts · 272 votes
    3w

    @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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  • Matthew MorrowBusiness Member
    Investor · PA - NY - NJ · Member since 2019 · 936 posts · 337 votes
    2w

    @Amanda Grzywaczewski that's a rough spot, and I'm sorry you're dealing with it. Your attorney is the right person for the bankruptcy and lien side, so I'll stay out of that. On the practical side, I'd get a new licensed contractor and the local code office through each property to find out exactly what it takes to close those permits and get the CO. That gives you a real number and a path, instead of two stalled jobs. Going forward, pay in draws tied to finished work you or someone you trust has actually seen, and get lien waivers from the subs with each draw. Hope you get it worked out.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2w

    We are seeing this all the time on many fronts. We are suing a contractor right now who did something very similar, and we are waiting for him to file bankruptcy. We also provided lending to an individual in the past who took the money, used it for other things, and then turned around and filed bankruptcy.

    In one of these cases, we have been able to show they were fraudulent, so we're hoping the debt will not get wiped by bankruptcy. That is one thing you can do with your attorney: if you can show that there was fraud, fraud is not dischargeable in a bankruptcy. Now, that doesn't mean you'll ever collect the money, but it could mean that the debt has not been wiped.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2w

    Sorry to hear about this..

    if its a chapter 7 and there is no criminal me personally I would not spend a dime on attorney at this point you would just be paying money that will never come back to you..

    If you dont have the liquidity to fix the houses up and finish them then the question is do you have loans on the property or do you own them free and clear ?

    if you have loans those might be HML or PM I would be talking with them .. the lender is in a bad position as well. So they may step in with funds to finish it I know i would. If not and there is no debt on the properties you get a bridge loan and finish the projects. U will just have to wait and see if any of the subs file liens many dont or have not given proper pre lien notices and will do nothing. Bigger suppliers that did give proper lien notice will for sure file the liens in most instances.

    what you could have done to protect yourself is well known but that is water under the bridge now .. Now its just trying to salvage.

    Bottom line from my POV

    1. chapter 7 for the contractor your not going to get anything so why spend money there its wasted.

    2. if there is debt your now trying to protect your lender and you need to contact them on how to help you finish, without them putting YOU into default.

    3. If no debt finding funds either your personal liquidity or new loan to finish.

    And as others have said get with the city to see what actually needs to be done. And if this is remote rehab I E you dont live there it makes it that much tougher you may have to go there and spend sometime digging through this personally.

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  • Amanda Grzywaczewski
    OP
    Investor · NY · Member since 2025 · 8 posts · 4 votes
    2w

    Thank you to everyone who has replied! Your insight and knowledge is greatly appreciated. Right now I am going through the motions and doing everything to protect myself, the assets (can I call them that right now 😅) and get the projects moving again! If anyone else has any brilliant ideas that haven’t been mentioned, I’m all ears!

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