Non-Profit Seeking To Buy and Forgive Debts
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.