An offshoot of Occupy Wall Street is organizing to purchase and forgive
bundles of debts. The group, called
Rolling Jubilee, will be raising funds in order to purchase distressed debt.
Distressed debts are generally accounts that have been delinquent for quite
some time. Credit card companies, student loan servicers, medical billing
companies, and others will often sell off bundles of bad debt in an attempt
to recover what they can on the debts. The third-party debt purchaser
then attempts to collect the debt from the consumer.
Distressed debts are often sold for a fraction of what is actually owed
-- in some cases, pennies on the dollar. When debt buyers purchase a bundle
of distressed debt, they can often make a profit simply by collecting
on a handfull of the debts in the bundle.
In this situation, Rolling Jubliee seeks to use the "pennies on the
dollar" pricing of distressed debt the advantage of consumers. Instead
of collecting the debt, the group plans to forgive the debt. It's
a laudible goal. The group has already conducted a test run wherein it
purchased $14,000 of debt for $500. Leveraging the pricing of these debts
to maximize the number of debts that can be purchased and forgiven is
a great idea.
While it's a great idea, I do see a few issues that are worth noting.
1. There's trillions of dollars in debt out there. This is a good start,
but likely won't ever make a dent unless the idea catches on.
2. Apparently, the people whose debts are forgiven don't even know
about it. If the group isn't documenting the debt forgiveness and
then giving proof of it to the consumer, then a few problems present themselves.
Let's suppose that the company that sold the distressed debt continues
to report a delinquent account on the consumer's credit report. Without
proof that the debt was sold and forgiven, it may be extremely difficult
to have the erroneous reporting removed.
What about the loan documentation? Did the bundle of debt include the proper
documents to demonstrate that Rolling Jubilee now owns the debt? When
I defend consumers in debt collection cases, one of my first questions
is whether the plaintiff has the standing to sue. In general, this question
boils down to whether the proper documents exist to prove that the debt
is owed and was properly transferred to the party trying to collect. It's
not too far-fetched to imagine a situation where Rolling Jubliee lacks
the standing to forgive a debt.
3. Isn't there some hidden tax liability here? If Rolling Jubliee is
forgiving these debts, then aren't the consumers that benefit actually
receiving income? Most people probably don't realize it, but when
a creditor forgives a debt, it is considered income by the IRS. In most
situations, the creditor would send the consumer a form 1099, which would
state the amount of debt forgiven.
Nothing I've seen about Rolling Jubliee indicates that they are planning
to send 1099s to the consumers whose debts they forgive. This may not
be a major issue -- if the IRS came asking, the consumer could reasonably
argue that he knew nothing about the debt forgiveness. This is an especially
strong argument because it does not seem that Rolling Jubilee is notifying
consumers when it buys and forgives their debts.
On the whole, this is an interesting idea. I like it because it targets
a common industry practice (the third-party debt purchaser market) and
uses that practice to release as many debts as possible. It's a bit
of absurdist theater that makes a good point. If the concept takes off,
then perhaps many groups that do this will surface.
On the other hand, I wonder whether the people doing this are doing it
"the right way" if they are not notifying the consumer about
the forgiven debt. And aren't we just legitimizing the "sell
an account with no documentation" aspect of the industry?
I guess we'll just have to wait and see.
H/t to David Dayden and Firedoglake for
spotting this one.