For the benefit of folks who might not understand how debt collection works, which may include OWS: if you buy $10,000 of an individual's debt for $500 and then forgive the debt, they have just incurred income of $10,000 and are obligated to pay taxes on it exactly as if you had handed them $10,000 in cash for services rendered. If you don't inform the IRS that you forgave the debt, via a 1099-C, you're going to get wrist-slapped mightily if they think it is an honest mistake or, if you're, say, doing it as a political statement, you will be afforded the opportunity to make your political statement in front of a judge hearing your case for criminal tax evasion.
This is not accounting advice, by the way. There's some wrinkles if the debt was caused by your principal residence, due to some of the recovery measures passed two years ago. If its, say, CC or medical debt, though...
Hi everyone. I want to assure you all that we are aware of the tax implications. We are working with a pro-bono tax lawyer and have called the IRS several times. The IRS informed us that we do not meet the requirements to file a 1099-c (we are not a bank, credit union, etc.)
Our tax lawyer has written some technical langue for our website. The bottom line is that we will be purchasing debt of people who are most likely insolvent and if you are insolvent there is no tax implications. Period. Even if they are not insolvent the chain of events that would have to take place to result in this counting as taxable income is highly unlikely. It's not impossible, but it's very very very (lots more verys) unlikely.
The long answer is much longer and more technical but rest assured, we are aware of the tax implications and it's not a problem.
This sounds outrageously risky. Unless you have written, signed approval from the IRS for your plan I wouldn't dare make a move. Once you're in their sights it's damn near impossible to get away. In the current economic climate it doesn't take much to convince a jury you deserve to go to prison for tax evasion and/or fraud. A pro-bono lawyer can not stand against the legions of the IRS.
The requirements of the 1099-c, Forgiveness of Debt is for any amount forgiven over $600. The argument for not filing a 1099-c for amounts over 600.00 is that one is not likely to know how much principle was forgiven. This is an important part of the code for the 1099-c. Believe it or not. Most Credit Issuers do not know the answer to that question. Lastly, how would the IRS know that a debt was forgiven? These transactions of buying debt are not reported to the IRS. I have been buying debt for 11 years and wrote a book on the subject.
Bankruptcy ruins your credit. It disqualifies you from holding certain jobs (such as in a company requiring people handling cash to be bonded), not to mention that credit checks are part of background checks these days. Some debt is difficult to discharge in bankruptcy (student loans). It can hurt chances of getting security clearance.
What the OP is offering seems to be a nice alternative.
But if you're insolvent, doesn't that mean you are... well, insolvent, as in not able to return credits? That's what "credit" means, no? If some company for some reason (which evades me, but that's their choice) doesn't want to hire insolvent people, wouldn't presenting oneself as solvent be a deception?
Student loans is a good cause though, indeed it is very hard to get rid of. But since they carry government guarantees (unless it's a private ones) - why would one be willing to sell it for cents on a dollar instead of just getting the money back from the state?
I'm no expert in credit scores, but... If the original creditor already filed with the credit bureaus, that's definitely a negative on your credit. But I think the OWS can report that you "repaid" the debt which would be good. They could also bargain with the creditor to remove the negative report. Also, just reducing your balance of debt is good for credit. Plus, I don't think there's anything worse you can do for your score or future hopes of loans than declaring bankruptcy.
IIRC, if your debt is being sold to a broker at pennies on the dollar -which is pretty much the only way OWS can get its hands on it- the bank has already long since given up on getting you to pay, and the credit bureaus have long since been informed. In other words, the damage to your credit is mostly already done; an actual bankruptcy would hurt worse, but you're still in for a world of pain.
Not only is it bad, a BK on your file means you will have to use 'special' finance to get a car loan and it will be impossible to find a bank to underwrite a sub-prime loan for a house (for seven years). You would also have to pay a higher rent security deposit on an apartment.
Perhaps not home ownership - but in many (most?) parts of this country a reliable vehicle is an absolute requirement for holding down a job. A bankrupt person, if anything, is in greatest need of a trustworthy car, and is also the most likely to require a loan to do so.
There's also the notion of rent - people who've always had good credit don't really know how different renting is like for people who have bad credit. I came to this country a few years ago with zero US credit rating, and even with a high salary, offer letters, etc, had one hell of a time finding a place to live. Many landlords simply will not consider you, while others charge exorbitant deposits to cover the risk.
The recently bankrupt are also the least able to afford a security deposit several times higher than what everyone else pays.
The reality of credit in the US is that your life gets exponentially harder as your credit worsens, and the difficulty in turning that ship around increases dramatically. People who've never had to suffer from bad/no credit really need to examine this before clucking judgmentally.
I came into US with no credit too, and had absolutely no problem to rent. Actually, I had much more problem finding lenders willing to accept my pets than my credit (for some reason, most of the local apartments hate pets, no matter how small and harmless). Yes, they asked for security deposits (not exorbitant - 1-2 months, and many require it even with good credit), and yes, car loan I got was outrageously expensive compared to what I could've gotten with good credit - but I still could buy anything I needed.
I guess maybe in the Silicon Valley everybody is used to immigrants so nobody is surprised when the person with no credit shows up, especially if they have the actual money. If you have no money that's different, but then the primary problem is not credit.
BK, foreclosure of a home loan, and repossession of a car from a loan leave flags on one's credit file that are very different from no credit or even bad credit.
If a person with no credit history in the USA (like a naturalized alien) is added as an authorized user to an existing credit account the credit history of this account is 'cloned' to the new addition.
Low to a fiscally solvent person. Even a couple thousand dollars is loan-worthy amounts to someone fresh out of a bankruptcy. Pawn shops and payday loan shops, after all, are a testament to the poor's need for small loans.
Could be. But there are some unlucky people in there as well - single parents who bought a house at the peak of the housing bubble because they were afraid that home prices would keep rising and leave them without a place to live. And then promptly lost their job in the recession.
Real estate speculators who made highly leveraged bets that went bad are in fact the sort of people who should, perhaps, not get the opportunity to repeat their mistakes.
Thanks. I never lived in the US. I came to Britain (from Germany) with neither car nor credit history. They let me rent a place, and I never had to buy a car. (Oh, and didn't have to worry about health insurance, either. But that's a slightly different topic.)
I wonder how my move to Singapore will play out.
But should I ever come to the US, I'll make sure I have plenty of money.
If you know how to hustle in the vernacular sense you can come to the USA penniless and retire wealthy.
The USA is a great place if you want/need the rule of law to protect property.
Overall, the US civil legal system is not corrupt. In many places in Asia and E. Europe corruption is systemic. It is much more difficult to keep a successful business in such an environment.
One example is real estate escrow services with title insurance.
Are you living in a different US? I'm not saying the path to wealth is beyond my horizon, but there's a lot in the way that only exists because previous generations managed things poorly. Someone starting a little further behind would have an exponentially harder time.
I am saying the USA is the easiest and safest place on planet earth to start your own business. If you know how to:
1. buy low & sell high
2. defer personal gratification
3. save a % of everything you earn
you can gradually grow wealthy.
The world is in recession, and the US might be starting to recover. It is a hard market right now. But it will recover and boom (and then crash) again.
I have traveled in Russia and Mexico and made friends with regular people who live there. I also studied economics at university. I am thinking about what I am writing here.
And you have the means to travel to Russia and Mexico with enough depth to get to know people there, and went to a university.
Travel is beyond the means of most people in the US, both in time (can't get time off) and money (living paycheck to paycheck is common). That's if you're fortunate enough to be in the upper range of the middle class. Much lower and you're lucky to see a movie once a year, or participate in the broader culture at all.
What seems to matter most is an area's social and physical infrastructure. A person in the poorest part of NYC can scrape together enough for a subway ride to a better part of town to look for opportunity. They might even have access to a charity transportation service.
A person in the suburbs is doomed if their car breaks down, unless they can afford to fix it or know someone with the time to shuttle them around.
These are understandings derived from my experience and the experiences of people I know. I only took an introductory economics class at a community college, but I've also known plenty of well-educated, well-traveled people with no perspective. It seems like depth of education and experience matters more than breadth.
Consider the possibility that your studies and travels didn't open your eyes wide enough to the situation in your own country.
> I am very curious what your specific examples are.
The world is moving in the right direction--especially away from suburban nests of roads that require a car, which is highly relevant to my own obstacles--, so I don't see a point in elaborating.
> 1. buy low & sell high 2. defer personal gratification 3. save a % of everything you earn
What if you start with nothing, in a place with little or no physical mobility? If you're lucky, someone you have access to has connections and is willing to work with you.
> I have traveled in Russia and Mexico and made friends with regular people who live there. I also studied economics at university. I am thinking about what I am writing here.
How much time have you spent in the US? I'm assuming you don't live here from the way you write.
Being and entrepeneur does not require you to approve the actions of other entrepenuers. Surely you can be an entrepeneur and have higher moral standards than Donald Trump.
Or perhaps if you get sick and have horrendously high medical bills that your insurance decides not to cover because you failed to report a hangnail on your application (or got fired from a job and then got screwed by a pre-existing condition). Just a thought.
Expensive in this case (for the US) meaning $700 to $2000. Which is rather a lot for the insolvent. Not to mention the paperwork sounds like an ordeal.
I think there is a psychological block for a lot of people too. It takes a certain point-of-view and education to be able to enter into lending arrangements with creditors with the perspective: "I believe I am going to make a profit and we will both win. But there is a chance I will not be able to. The lender is self-consciously taking a risk, which they are being compensated for via interest (same basic principle with an investor). If things go badly and I need to declare bankruptcy, then well, yes, it sucks. But I have done nothing morally wrong."
Fun fact: Henry Ford, Abraham Lincoln, and Walt Disney declared bankruptcy.
Interest compensation for risk is distributed, granted. X percent of creditors will default on their loans. You don't know ahead of time who will and who won't. So demand Y percent from everyone over and above what you would in a world where everyone paid.
If that's not what you are getting at, I don't get your comment? Unless we are talking of a foolish lender?
Edit: Durr. Just got it. You are talking about the return the lender receives, the reason he lends instead of consumes. Yes, part of interest is risk compensation.
Yes, it is possible. I have purchased my daughter's debt from a hospital stay. This was 20 years ago but I called the creditor and told them that she was an unemployed college student and they weren't likely to get anything from her, I on the other hand was willing to pay them .20 on the dollar for the debt. They accepted and I paid the debt. (this was not the original creditor but I believe the third, the debt having been sold twice, so they likely made a little money on it and took what I offered rather than take the chance of getting less through another sale or nothing)
Most companies that own debt and those who collect for them will take a deep discount on a lot of the debt they purchase/collect. Individuals should be able to routinely settle debt for as low as 20 cents for every dollar they owe. This would be too expensive for Strike Debt to fund.
A bank will make a loan, after 120 (or 180) days of no payment the loan becomes "charged off", this means it's now tax-exempt
The purpose of making such a declaration is to give the
bank a tax exemption on the debt
Then a debt buyer will purchase the value of the debt for a percentage
A debt buyer is a company [..] that purchases delinquent
or charged-off debts from a creditor for a fraction of
the face value of the debt.
with the pricing generally being
Depending on the age and history of the debt, a buyer
typically pays between 3 and 16 percent of the face
value of the debt.
Does this mean that the debt buyer than becomes in possession of the value of the debt for tax purposes, even after it has been charged-off by the company that initially granted the debt? or do they become in possessions of the amount paid (eg: buying $1,000 debt for $100, do they now own $1,000 for tax or $100?). Wikipedia isn't clear.
Typically, the charge-off would be the difference between the original face value of the debt and the price it was sold to the debt collector.
The debt collector's tax basis is the price they paid for the debt. If they fail to collect the debt, there is a net loss equal to what they paid for the debt. This tax loss can be set against other debts that are recovered (profits).
If the full face value of the debt is recovered, the debt collector owes tax on the difference between their basis (what they paid for the debt) and the amount collected from the debtor. Of course, this profit is set against the losses on the remainder of the debt portfolio, so the net tax owed is the cumulative debts collected above the basis, less the loss on uncollected debt.
@patio11, you need to understand two important facts:
1. The executive branch has broad discretion about bringing people to the judiciary branch for sanction. For example, district attorneys do not prosecute every case brought to them.
2. Occupy has excellent legal council. At the local, state, and federal level the few (none?) of the cases that have been brought to court have resulted in a conviction. I cite the victory record as proof of their skill and occupy's integrity, not of a lust for litigation.
Couldn't OWS just hold it forever and not do anything with it? i.e. "Look I bought your debt, you don't have to pay me a penny for it ever, but I can't officially forgive you since to do so would subject you an income tax obligation. Just don't worry about it ever again and get on with your life."
I'm not sure of the exact mechanism, but... no. This was a common money laundering tactic in the '80s and '90s. At some point the IRS can declare the debt forgiven regardless of whatever the debt holder says, in the same way they can declare your money-losing business a "hobby" if they think you're not actually trying to make money.
The IRS has pretty wide latitude in these kinds of cases - I think the tax code is the only area of law where the government pretty much wins unless you prove your innocence.
You wouldn't have to pay taxes if the assets you collected were less than what you paid for debts. If they were greater, well, that would make you just another bill collector.
I'm just thinking out loud here, but I would suspect that the IRS would only know that the debt was forgiven if the debt owner wrote the debt off as a loss on their taxes. If they simply hold it and do nothing, even if they deleted it from your credit record (which they can do), no taxable event would have occurred. I could be wrong in this crazy country of ours, but I believe there is no law requiring a debt owner to attempt to collect on it, or to write off a debt as noncollectable after a certain period of time.
I'm not 100% sure, but I'd be completely shocked if the banks and credit card companies (or whoever) that sell the debt didn't have to report the sale to some government agency, or even the IRS itself, so the IRS could probably find out that way.
And now that OWS has announced they're buying up debt and forgiving it, the IRS is going to have a pretty good idea what's going on...
If person A is in debt from Agency X, am I right in thinking that OWS would have to buy the debt from Agency X? They can't really buy debt from person A since A is in the hole...
Or OWS would buy from person A and, by some weird tax provision, doesn't have to pay agency A the entire amount?
Person A bounces a credit card payment to MegaBank, MegaBank asserts their credit card is in default and demands full payment immediately, A does nothing, MegaBank attempts to collect fruitlessly for ~4 months, A does nothing, MegaBank sells debt (principal + interest) to Agency X, Agency X attempts to collect fruitlessly for 18 months, A does nothing, Agency X sells it to Agency Y, A does nothing, Agency Y attempts to collect fruitlessly for 12 months, A does nothing, Agency Y sells the debt to Agency Z, A does ntohing, Agency Z attempts to collect fruitlessly for 12 months, A does nothing, Agency Z sells the debt to OWS for 5 cents on the dollar.
Each time I say "fruitlessly" read "They autodialed them between 2 and 5 times per week plus sent biweekly dunning letters."
For your added edification, while MegaBank, Agency X, and Agency Y all have no interest in the debt after it is sold to Z, many of them have very terrible recordkeeping practices, so it is entirely possible that e.g. Agency X will attempt to collect on the debt even after selling it, and potentially even after it is cancelled by OWS. Person A may not notice that this has happened, because Person A is likely a) delinquent on more than a dozen similar debts and b) Person A very likely has a very different level of personal responsibility as compared to many people in your reference set.
A variation of "Buy debt at 25 cents on the dollar, collect 40 cents on the dollar in interest and fees, spend 8 cents on the dollar for high school graduates to man the phones and 5 cents on the dollar for overhead.", with numbers adjusted depending on how toxic their average pool of receivables is.
If I recall correctly, during the robo signing debacle - some banks ended up losing control/chain of ownership on those mortgages.
So in that subset of cases no one even legally owns the debt, (but the banks still tried to assert control. IIRC the judicial system didn't take too kindly to their assertion)
They actually collect on some small portion of the debt, which, along with the sale of the remaining obligations, ends up being enough to pay their expenses and produce some amount of profit.
Why not ask the people to make nominal payments, and use those payments to purchase additional discounted debt? This would both solve the IRS problem and potentially make this a self-sustaining venture.
Well, you could actually use the tax issue as a powerful incentive to pay. "You have a choice: you can pay a small amount every month, or we can write your debt off in full. However, if you choose the write-off, please be aware that you will be liable to the IRS for the full amount of the taxes. You may find it easier to work with us rather than them".
Good point, patio11. If debtors don't pay back their debt after after a certain time period, they are supposed to report it as income, but I doubt very many do. Setting up an organization like this puts the onus on the organization to file the 1099-C's
if you buy $10,000 of an individual's debt for $500 and then forgive the debt, they have just incurred income of $10,000 and are obligated to pay taxes on it exactly as if you had handed them $10,000 in cash for services rendered.
It could alternatively be characterized as a gift, in which case it is not income to the recipient (but could incur gift taxes to the "gifter").
If you don't inform the IRS that you forgave the debt, via a 1099-C, you're going to get wrist-slapped mightily if they think it is an honest mistake or, if you're, say, doing it as a political statement, you will be afforded the opportunity to make your political statement in front of a judge hearing your case for criminal tax evasion.
No. If it is treated as a gift--gifts under a certain size do not need to be declared. If it is not treated as a gift, only a creditor that is a financial institution is required to file a Form 1099-C. loan. 1099-C is only required for financial institutions or entities engaged in the business of lending money. http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. Moreover, the IRS does exercise discretion over pursuing cases--as the OP has already indicated, they have provided their blessing to these transactions and it is unlikely that any negative tax consequences will accrue (especially in this political environment).
But gifts are capped at $12,000 per year, which puts something of a damper on the whole point of this, unless they've figured out a legal way to farm out who gets credit. So either they've promised not to go after these cases, or ... something else?
It is my understanding that this is how it works: OWS volunteers will buy the loan (not OWS itself, I use OWS in the collective sense). They will then collectively forgive the loan. Since each loan is held and forgiven by a group of people, no one individual is likely to come close to the yearly gift cap. Individuals can participate in the OWS loan purchases until they run into the wall (i.e., their ability to participate in the purchase or to make further gifts). Note that this is why I assume the OWS loan forgiveness is treated as a gift--because in the above scenario, that is clearly the intent.
Alternatively, OWS would purchase the loan itself and then forgive the loan. OWS is a non-profit entity, so there would not appear to be any tax issues arising from this (or at least, if there are, the IRS has already indicated that such issues will ignored).
Forgetting the law but looking at this from the governments tax collecting point of view the bank has incurred a loss which they deduct from their taxes and this needs to be offset by income from the person who has their loan forgiven. If this doesn't happen then the government loses revenue and it also opens up the possibility of people using loan forgiveness to dodge taxes.
Occupy Wall Street is not a bank. They are purchasing the loan from the bank. The bank may be able to take a loss on the sale of the loan to OWS, but that is irrelevant to what OWS does with the loan once it is their property.
If this doesn't happen then the government loses revenue and it also opens up the possibility of people using loan forgiveness to dodge taxes.
Well, yes. And the IRS will certainly pursue cases where it is clear that loan forgiveness is used to dodge taxes. But that is not what is happening here. OWS is purchasing loans to help people get out from crushing insolvency. The alternative is the debtor's declaring bankruptcy, in which case no one--not the government, nor the private creditors--gets anything. Note also that OWS is a non-profit entity, so issues of tax revenue loss are generally irrelevant.
>Moreover, the IRS does exercise discretion over pursuing cases--as the OP has already indicated, they have provided their blessing to these transactions and it is unlikely that any negative tax consequences will accrue (especially in this political environment).
Also it would be kind of unfair, if the government could spend loads of the people's money to bail out banks, but the people can't spend money to bail out people ... I know, "fair" doesn't necessarily have much to do with law, but still.
This is not accounting advice, by the way. There's some wrinkles if the debt was caused by your principal residence, due to some of the recovery measures passed two years ago. If its, say, CC or medical debt, though...