Occupy Wall Street’s Debt Jubilee: A Gimmick with Tax Risk

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It’s not exactly pleasant being a nay-sayer about a popular Occupy Wall Street initiative launched by a working group called Strike Debt, that of buying consumer debt at a discount and forgiving it, particularly when the movement generally is demonstrating its effectiveness and relevance. Recent accomplishments include Occupy Sandy proving more competent at disaster relief than either the Red Cross or FEMA, and Strike Debt publishing , the Debt Resistors’ Operations Manual.

If you stand far enough away, the Strike Debt debt cancellation initiative, called Rolling Jubilee, looks like a simple and clever way to beat banks at their own game. So it’s not surprising that it has attracted a roster of celebrity supporters. But like most things in finance, the devil lies in the details, and the Rolling Jubilee plan, on closer inspection, is wanting. It suffers from three flaws: it enriches the participants in a seedy backwater and may wind up leading banks to try to foist clearly unenforceable debt onto the new chump buyer, OWS. Second, the OWS effort is likely to be trivial relative to the scale of the problem, thus diverting energy and attention from broader scale remedies. Third, tax risks in the plan mean it could wind up doing far more harm than good.

The first two problems seem obvious, yet have been ignored by many. Debt collection is a shakedown operation. And I’m puzzled at the lack of instinctive revulsion to a plan that perpetuates and enriches the participants in abusive practices. I don’t think you’d see such enthusiasm, say, for a plan to deal with trafficking in women by raising funds to buy a few of the victims from the sex slave traders and free them. But the economic relationship to a predatory system is similar.

Most of the debt that winds up in the hands of debt collectors is unenforceable. Some of the time credit that was extinguished in bankruptcy, disputed by the borrower but somehow not erased from lender records, or past the statute of limitations. [check Chase]. Even when the borrower did incur the debt, it often is not enforceable if challenged. The lender needs to provide evidence both that the borrower incurred the obligation (such as the signed credit card agreement and any related amendments to substantiate interest rate charges; records of the specific charge and the payment history to show the amount is still outstanding). But many borrowers are afraid of debt collectors (who often engage in abusive and illegal strategies, like calling more than once a day and harassing borrowers at work) and ignore letters and court summons. In addition, some lenders also engage in “sewer service” as in never letting the borrower know they are scheduled for a hearing before a judge. As a result, even if the debt isn’t valid, if a debt collector goes to court and the borrower does not contest his filing, the collector will get a default judgment and can garnish wages or have the borrower’s bank account debited. That’s the reason this sort of debt trades for pennies on the dollar; the original lender probably would have secured payment if the borrower had the means of paying and the debt was legitimate.

The effect of Occupy Wall Street entering as a buyer if they operate on any scale (which remains to be seen) would be to increase the price of this junk debt. Given that banks like Chase have been found to knowingly sell clearly invalid debt to debt collectors, the presence of another bidder in the market is almost certain to raise the price of debt sent to collection. And it has the potential to increase gaming via banks selling more debt that they know is invalid but would take work for a third party to ascertain that (such as debt discharged in bankruptcy).

The second failing is that the scale of this effort is likely to be too small to have much impact. That reduces the risk of OWS’s operation leading to much in the way of price increases of junk debt, but it renders the activity more like handing $5 bills to homeless people: it provided random relief but doesn’t address root causes. Doug Henwood does some calculations:

So far, both Rolling Jubilee and the commentators have been rather light with numbers. As I’m writing this, RJ has raised $137,688. Since they figure they can buy bad debt for about five cents on the dollar, that means they could “abolish” (the evocation of the anti-slavery movement is no accident) $2,758,584 in debt. Though they don’t say, it’s almost certain that the debt they aim to buy is the credit card kind. Student debt, even if delinquent, isn’t sold into the secondary market. Debt backed by things—as auto loans are by vehicles and mortgages by houses—aren’t generally sold that way either, because lenders can seize the underlying assets. Though there are other kinds of unsecured personal loans (those backed by pledges only, and not things), the bulk of them are credit cards, so we’ll do the math on them.

According to the FDIC, there was $664.3 billion credit card debt outstanding in the second quarter of 2012. Of that, $16.5 billion was 30 days or more past due. Banks had charged off $8.5 billion. They’re required by regulators to do that once an account is 180 days past due, but that doesn’t mean the debt is extinguished. Though the bank removes the asset from its balance sheet and takes a (tax-deductible) loss, the debt still exists. The bank can try to collect it on its own, or sell the bad debt to the vultures described above.

Let’s think about that $8.5 billion. The people who owe that money are probably getting threatening communications from the banks or whoever now holds the claims. If RJ could raise $1 million—they’re more than 1/8th of the way there now—they could buy $20 million in debt, or 0.2% of what’s been charged off. To buy all the charged-off debt at five cents on the dollar, they’d need to raise $423 million. But of course if any more than notional amounts of money were put to this task, the price of the debt would rise dramatically. To buy a tenth of it at ten cents on the dollar they’d need $85 million. In other words, given those sums, the monetary angle for RJ is purely symbolic.

Strike Debt had a fundraiser on Friday and is up to be able to forgive $5 million, which they claim will be medical debt. But as you can see, this is a drop in the bucket.

The third issue, which the promoters of this idea are glossing over, is that this scheme has tax risks. Normally, forgiveness of debt is taxable income to the borrower and the party writing off the debt is required to notify the IRS. Strike Debt cheerily asserts in its FAQ that they can treat the forgiveness as a gift and escape this obligation. They also claim to have gotten “advice” but query the caliber of this advice; the people who come up with tax avoidance devices that are stricken down by the IRS are also professionals and gave advice that their program would pass muster.

The reading I have gotten from recognized tax experts is that this issue really is grey. The applicable law is binary: debt forgiveness = income in the amount of the debt, unless it’s a gift. And even if it is a gift, there could be gift tax payable by the donor. The usual limit for the gift tax exclusion is $13,000 per donee per year. OWS does not appear to have allowed for its exposure to gift taxes in its calculations of how much debt it can extinguish.

The problem here is the application of this law to Strike Debt facts. No one can be sure until a court issues a ruling. Whether something is a gift is a factual question. The IRS will not give a ruling on whether something is a gift. That’s why there can be no definitive answer.

Moreover, it’s problematic when the giver of the gift is the holder of the debt, standing in the shoes of the lender. That makes it look a lot like straight-up debt forgiveness. And the “abolish” language that Strike Debt has used in its literature is consistent with that characterization.

There was a temporary mortgage relief provision enacted in 2007 that expires in 2013. The existence of that exception reinforces the view that debt cancellation = income unless a specific exception applies (section 108(a)(1)(E)). Especially since many mortgages are held by investors who are not the original lender.

Here is what the IRS says about debt cancellation by gift (1995 Market Segment Specialization paper for grain farmers):

Cancellation by Gift (IRC section 102)

Gifts or bequests are excluded from gross income. Congress recognized that the presence of donative intent on the part of the creditor is difficult (if not impossible) to establish in a business setting. The committee reports accompanying the Bankruptcy Tax Act of 1980 state: “*** it is intended that there will not be any gift exception in a commercial context (such as, a shareholder-corporation relationship) to the general rule that income is realized on discharge of indebtedness.” Thus, the gift exception generally applies only in noncommercial contexts.

OWS is relying on the notion that they are organized as a not for profit and is not making money as a lender, hence this make their activity noncommericial. The sale of debt is a commercial activity. When OWS purchases debt, it enters into a commercial relationship with the debtor. OWS would have to overcome the IRS interpetation of legislative intent that there can be no gift in a commercial context. Case law requires detached and disinterested generosity on the part of the donor for a gift. Moreover, middle class borrowers are not considered a proper charitable class under the tax law.

Even if OWS can prove forgiveness is a gift, gift tax may be owed. The donor owes gift tax on a transfer unless it is $13,000 or less per donee per year. The medical expense exception to the taxable gift statute requires direct payment to the provider of medical services. Reimbursement of medical expenses is subject to gift tax.

Now you might say, but who would raise this issue? The IRS might decide to go after Strike Debt directly, either for failure to report debt cancellations or for gift taxes due. Or the issue might come up on an individual level (for instance, people who are going through ugly divorces can have their ex report them to the IRS out of a desire for vengeance and in the hope of collecting a whistleblower award if the IRS pursues their lead and prevails). OWS risks making a test case out of an effort to help a hapless middle class borrower.

I wish Strike Debt had gone about this in a way that would address the problem of abusive debt collection more broadly. For instance, in the mortgage space, counsellors and Legal Aid have been enormously helpful to stressed homeowners. The debt collectors often have weak enough cases that an adequately represented individual could defeat in court.

Strike Debt might also be able to use its debt purchases to develop legal theories for suing the debt sellers (as in they are engaging in fraud by selling debts that are invalid) or suing debt collectors for harassment. Strike Debt also might want to work to get debtor/creditor laws changed. The problem is that really making a dent on this issue is a hard slog, and doesn’t lend itself to the appearance of quick and easy victories that make for good solicitation pitches.

I hope the tax issue does not blow up on Strike Debt and the people it is trying to help. The Rolling Jubilee program has helped raise the profile of the issue of abusive debt collection and helps demonstrate that OWS is not a flash in the pan. But, sadly, beating banks at their own game is unlikely to be an easy proposition.

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  1. steve from virginia

    Sounds a bit like Max Keiser’s ‘Buy Silver, crash JP Morgan-Chase’ endeavor … a publicity stunt.

    The only way to effectively end consumer- and mortgage debt abuse is when large numbers of debtors simply walk away and repudiate their debts. The credit-enforcement mechanism cannot cope with more than modest numbers and the absence of cash flow would certainly succeed in crashing the TBTF banks where buying some old candlesticks would fail.

    Occupy taking some of the vultures to civil court would also be effective IMHO. Even if the Occupy folks don’t win outright they would add to vultures’ costs and diminish the trade’s appeal. In the Federal system the vultures would be subject to discovery … which they would not be eager to withstand.

    Paying a director to shoot a documentary about the collection business and putting it on TV … stake through the heart.

    1. Yves Smith Post author

      I like the documentary idea a LOT, particularly because it would tell the public through another channel that these debt collectors can often be beaten. And it would also alert judges. Judicial opinion about borrowers contesting foreclosures really changed as a result of the robosigning scandal. The more light on these scoundrels, the better.

      1. just me

        Yves, the thing that catches (IANAL) me here is that OWS is labeled a nonprofit, and it’s like a private entity, but it’s really functioning in a public welfare, commons way to fill a need that government has failed to.

        In my mind, OWS is anathema to both corporations and government for just that reason — it occupies commons, makes them visible, empowers them, shows they fill an unmet public need, constitutes a better alternative. Thinking of how Occupy Sandy did more effective good than either the Red Cross or FEMA.

        I don’t know how you start there, but I’d start there.

  2. Carla

    “Case law requires detached and disinterested generosity on the part of the donor for a gift.”

    Well, I guess it’s hard for Strike Debt and Rolling Jubilee to meet the test of “detached and disinterested generosity” since their actions are profoundly revolutionary actions launched against the criminal banking cartel on behalf of ordinary people, whom NOBODY ELSE of consequence is supporting in any way.

    It seems to me that this presents a fundamental threat to the financial industry and anyone allied with it.

    Having recently contributed to the Naked Capitalism fundraiser, I now find that Yves’ arguments against Strike Debt and the Rolling Jubilee have only encouraged me to contribute to those initiatives. I hope that lawyers dedicated to the public good, if there are any such, will defend SD and RJ against all the corporate shit that Yves is convinced will come their way. (IRS? more corporate shit; captured agency)

    Steve from virginia’s remarks and suggestions seem helpful.

    1. Yves Smith Post author

      I hate to tell you, but really good tax litigators are REALLY expensive. Sumitomo Bank hired one in the mid 1980s who beat the IRS. His rate was $1000 an hour. Imagine what a guy like that costs now.

      1. Carla

        I hope that lawyers dedicated to the public good, if there are any such, will defend SD and RJ PRO BONO against all the corporate shit that Yves is convinced will come their way.

    2. Susan

      three flaws:
      1) it enriches the participants in a seedy backwater and may wind up leading banks to try to foist clearly unenforceable debt onto the new chump buyer, OWS.
      However currently the seedy backwater impoverishes millions of people. It terrorizes them. They don’t know it’s an issue until their credit/debit card doesn’t work because their assests have been frozen – they didn’t go to court because they had no idea their business was even in court. Jubilee shines a light on this seedy, illegal practice. Government isn’t shining that light and neither is journalism. Wall Street got a pass and a bonus check in 2007-08. OWS brought a battery of lecos and fresnels right to the very doorstep of the issue and blasted it with light. People showed up and got pepper sprayed, beaten and jailed to bring attention to the issue. As the saying goes, “better than a sharp stick in the eye.” Maybe this is a big search light, an alarm, a good dose of sunshine, the best disinfectant.

      2) the OWS effort is likely to be trivial relative to the scale of the problem, thus diverting energy and attention from broader scale remedies.

      What broader scale remedies? Pray tell what your plan is Ms. Smith. WWYD? Shall we, um, pass some more ineffective “regulatory” legislation?

      3) tax risks in the plan mean it could wind up doing far more harm than good.

      But then you say “you hope” and that “it’s a grey area” and “if it’s over $13,000.” Sounds to me like maybe this and possibly that and gee, I hope this and speculate that.

      How about contacting some of the folks who actually engineered this effort and ask them to share their research, the reasons they decided that this was a way to go and what their end goal is?

      You say, “if you stand far enough away”. Seems to me that while you might have intended to go to Zucotti Park, you so far aren’t quite in the section where the police in SWAT gear with batons and pepper spray are arresting folks. Maybe you could get in there and report some of the real facts, history, planning, who’s who, what research, which lawyers advised whom.

      A lawsuit will be really expensive. Well, I’d imagine that the “value” of some of the OWS banking group was high, too, before they quit or got laid off from their high dollar inside banking jobs, too.

      This is ultimately too much speculation and handwrinigng on a Sunday afternoon.

      1. Yves Smith Post author

        The answer is already in the post, but you ignored it.

        The IRS does NOT give rulings on whether a transfer is a gift. This is written IRS policy on its website. Yet Strike Debt keeps saying it “checked with the IRS” and they said what they intend to do is fine. That means the answer they got is wrong (since it contradicts official IRS policy, which is to say nothing on this matter) and cannot be relied upon.

        I assume that what they got was a verbal response from a phone rep (people who are not lawyers and have gotten 20 hours of training on how to handle standard taxpayer questions) who doesn’t even know IRS policies, much the less the law on the matter.

  3. bob

    “Strike Debt might also be able to use its debt purchases to develop legal theories for suing the debt sellers (as in they are engaging in fraud by selling debts that are invalid)”

    That’s the answer. Buy the debt and prove it’s invalid. It could also establish, by way of doing the legwork, an ongoing conspiracy to defraud.

    This plan is going to backfire big time.

    Situation 1-

    1. Bad debt is created through fraudulent ID.

    2. Bad debt is contested by the real owner of the ID.

    3. Rather than try and fight the real owner, the debt is sold, quickly, after adding a bunch of fees. $500 fraud now up to $2000.

    4. OWS purchases and forgives the debt.

    5. (?)The person who was defraded by ID threft is then responsible for paying taxes on $2000 of “income”.

    If the debt was created with fraudelent ID, there is a good chance that the contact info for the person is incorrect. How does the real person recieve notice that they were “given” this money.

  4. steven

    What if Strike Debt were to keep the “debt” on the books, but simply charge $1 a year to the “borrower” ? In this case, the debt is not forgiven, but the payments are certainly manageable. It seems this would not trigger the tax consequences.

    1. Yves Smith Post author

      The IRS has rules in terms of both minimum interest rates and maturities. You have to say, for instance, that it’s a 3 year or 5 year or whatever year debt (and the IRS publishes minimum rates for certain maturity ranges) OR that its a revolving credit line (as in credit card debt) but those require amortization of principal + interest payments.

      Shorter: if you are going to call it debt, you have to charge interest and take action to get the principal amount of the loan back. This applies, BTW, even when you want to help out a family member. If you want to give more than $13,000, you not only have to treat the excess amount as a loan, you have to treat it as a loan, as in enter into an agreement, make interest payments (as specified, whether annual, quarterly, or monthly).

      1. Gordon Brooks

        Wait a minute, Yves, are you saying that it’s illegal to give no-interest or micro-interest loans over 13K? Like the loans the Fed gives to the banks? That in itself is a cause for revolution!

        1. Yves Smith Post author

          Yes. Interest rates now are actually low (ZIRP is reflected in the IRS tables) but you gotta observe the IRS minimums or else the person receiving it is at risk of having the loan called income and being taxed on it.

          1. jpe

            Actually, the person that makes the loan would be hit w/ taxable interest. The IRS characterizes the transaction as follows: gift of difference between actual interest and AFR minimum rate from the lender to the borrower, followed by payment of interest from borrower to the lender. So it’s a taxable gift to the lender and taxable interest to the lender, with no tax consequence to the borrower (see, IRC 7872)

    2. bob

      Leverage, good idea. Lever it up into the biggest non profit balance sheet in history, make the TBTF banks look like wimps.

      It also helps their “non-commercial” problem-

      No, we’re not trying to make money, we’re trying to lose it all. How can you call us commercial? Have you seen our balance sheet?

      1. Yves Smith Post author

        Bob, see comment above. Even family members have to charge interest and seek repayment on loans to relatives. Debt is debt and the IRS stipulates minimum rates for interest at various maturities (and “maturity” means the debt needs to be repaid when the time is up).

  5. Hugo Chavez

    You’ver raised some really interesting points. I guess symbolic palliative measures like this may be more of a waste of time than one would think on face-value.

  6. Toad The Wet Sprocket

    strikedebt is a failure getting out of the gate for the simple reason is that the enitre chargeoff and debt sale system for unsecured debt works to the bank/credit issuer’s advantage, in no small part to the OCC’s requirement for banks (at least for unsecured debt) that all uncollectible debt must be charged off the books at 180 days past due (For a while private label retail card operations had a 240 day limit, but they were able to get away with that due to the fact they were not a commercial bank-when Sears sold their portfolio to Citi, they had to go into their portfolio and chargeoff the 180+ past due accounts and sell them into the secondary market.)

    If you want to “fix” the system, you have to eliminate the secondary debt market for unsecured debt in its entirety; which means that the OCC’s 180 day chargeoff rule has to be eliminated – and with it, its corresponding tax break to the issuer of the line of credit.

    Ya think that’ll happen in this reality?

    1. Michael

      It is true that most unsecured revolving credit card issuers sell portfolios of charge off debt. Some do not. AMEX is a good example. Many credit unions another.

      Credit card issuers will often retain the debts after charge off and place them with assignement collectors for a couple of collection cycles (60 to 90 assignment intervals), and sell the uncollectible later.

  7. Timothy Y. Fong

    The argument about tax consequence, as well as the possibility of OWS getting hit with all the uncollectible debt is pretty convincing.

    I actually think it would be good if OWS could help people identify their debt and then buy it, sub rosa, for 5 cents on the dollar. I understand this would be impossible however.

    Regarding a documentary, I remember 60 minutes did a story about abusive debt collection practices a few years ago.

    Mass defaults are also a possible method, but the problem is that defaulting makes it hard for people to get a job, since credit checks are so endemic. Might be something in organizing those who have already defaulted though– perhaps a focused “name and shame” direct action/civil disobedience campaign aimed at the worst collectors.

  8. ThePhoo

    The banks have already charged off the debt. When they do that they are required to issue a 1099-c for the tax year that it was written off. The debtor would have been resposible for the tax on the write off that year. (Something that they can get out of if they are insolvent. (I forgot the tax for for that but if you are that broke it is easy to get out of the tax.))

    So the gift income should be a non-issue. Unless you can be taxed on the same income twice. Which I doubt. At the most Strike debt could only write off the value of what they paid for the debt. Which at pennies on the dollar should not hurt the debtor.

    1. jcarroll

      Banks do NOT issue a 1099-c when they charge-off a debt. They issue a 1099-c when they come to the conclusion that the debt is forever uncollectible. This usually does not happen until the Statute of Limitations runs. Since most lenders are selling off consumer debts before this trigger happens, very rarely does a lender actually issue a 1099-c. As the form owner of one of the consumer largest debt purchasing operations in the USm built over a 23 year period ( I sold the operation in 2006 after I realized that the lenders were just as irresponsible as the borrowers), my opinion is that this plan is just plain silly. The reality is that it is extremely difficult for a debt purchaser to win a case against a debtor, if the debtor is properly represented. The documents are usually non-existent and there is no one to testify as to the actual validity of the debt. OWS would be much better off putting their resources into a legal representation pool, to have the smartest consumer rights attorneys represent debtors at no charge. This would accomplish two things: 1. over time, debt buyers would stay away from debtors represented by OWS. Accordingly, the initial investment would multiply in effectiveness over time; 2. when the validity of a debt is questioned in litigation, a debt purchaser or lender is unable to simply write a 1099-c.

      1. ThePhoo

        I agree with you that the money would be better spent fighting the debt collectors. Most people do not realize the rights they have when fighting a debt.

        As to your point about the 1099-c’s. In what few instances I have seen (friends, family). I have not seen the bank not issue a 1099c. Granted, my sample size is small.

        I have never seen a 1099c issued over a medical bill though (only banks). I beleive everyone should learn how to fight those.

        On the whole the current collections process is vile and anything done to raise awareness and teach people to fight back is good. If anything maybe this as started more folks down this path.

      2. RepubAnon

        Here’s an idea: buy the debt, file suit, have the debtor file an Answer objecting to the validity of the debt.

        Then, the debt’s buyer dismisses the complaint with prejudice (meaning it cannot be refiled).

        No gift – results, as a court determined that the debt was not valid.

        I expect that the Infernal Revenue Service would eventually go after an organization that used this to side-step the gift tax, but they’d have some trouble.

        Perhaps a better solution is to tighten up the rules against abusive debt collection (as many observed above). This, coupled with bonuses paid out over 5-years (with charge-backs due to losses), might make the lenders more cautious.

        We need better supply-side regulation of the loan industry: if you’re going to criminalize heroin use, you need to punish the dealers. Punishing only the addicts assumes that they’re rational actors – and they often aren’t very rational. (Say, they’ve got terminal vcancer, and are buying the heroin to use for its original purpose as a better pain relief medication than morphine. If all the punishment falls on the buyer, and none on the seller (who also runs an ad campaign touting the joys of heroin use) – the result is a system that encourages irresponsible use of heroin.

        Loan-sharking used to be illegal – now, we call them “check cashing stores”

  9. diptherio

    Well, mind blowing morning for me. Who knew that the IRS can tell you that you HAVE to charge interest on a loan to a family member (only if it’s over $13,000, but still…)? And that they want a cut of any big gifts you decide to give. Crazy. I mean, I know there are reasons for these rules, to keep folks from hiding income and whatnot, but it also seems facially quite tyrannical.

    I really like the idea of using purchased debt as a way to sue the big banks for fraud. In fact, that could be a highly successful and sustainable business model in it’s own right. They could then use the money from the lawsuits (which it would, no doubt, take awhile to actually get) to purchase properties at sherriff’s auctions and foreclosure sales in which to house the houseless.

    I like RJ as a brand-building tool, but I think it is more a publicity stunt than a bid to really change our credit markets. It’s as much theater as anything else. The organizers seemed to acknowledge as much on Democracy Now! the other day. The tax issue sounds like it could be hairy, although a public battle with the ever-so-popular IRS might turn out to be another positive brand-builder for Occupy

    1. Yves Smith Post author

      They don’t tell YOU you have to charge it. The issue is that if you don’t the person receiving it is at risk of having it declared income and being taxed on it if you don’t. Odds are low but not zero. Of course, if you are rich, you can give them enough to pay the taxes too, but most people aren’t flush enough to do that.

    2. Phoenix Woman

      The 1099 issue has been dealt with already. From the Rolling Jubilee FAQ:

      Q. How will this affect people’s credit ratings?
      A. Rolling Jubilee will make reports to one of the three credit reporting agencies that these debts should be considered paid in full. In all cases people’s credit scores should be improved, but the amount of improvement will vary from person to person depending on their specific situation. By the time someone’s debt enters the secondary market their credit score will have already been damaged. In most cases reporting that this debt is paid in full will undo some, but not all, of that damage.

      Q. When a Rolling Jubilee abolishes someone’s debt will this raise their taxes?
      A. No. We double-checked this with the IRS and a project like this does not meet the requirements to file a 1099-C Cancellation of Debt form and will almost certainly have no effect on anyone’s taxes.

      1. Michael

        The original creditor reports the charge off the credit report. The purchaser of the defaulted debt may/may not report an additional tradeline.
        This effort would not have any ability to go back and change the credit entry by the original creditor as paid in full. The charge off entry by the original creditor would remain.
        Reporting nothing about the debt as the new owner would be better than reporting an additional collection tradeline as paid in full.

        1. Ms G

          That was my understanding of how this works (in reality) as well. Thanks for posting the explanation. The tax issue does sound like a straw man, or at least so far fetched as to border on the purely academic (and thus irrelevant here).

      2. Yves Smith Post author

        Phoenix Woman (hah, now I can’t get the comment to show up in the right place….),

        With all due respect, I’ve worked on deals that involved complex tax structuring, so I have direct experience with “novel” tax matters. I sincerely doubt anyone involved with Strike Debt does.

        You don’t call the IRS to get an opinion. As the post explains, the IRS will not issue a written opinion on a matter like this and the verbal opinion of a field rep is unreliable. As I wrote in comments to your post:

        I suggest you go back to the individuals who “checked” with the IRS and find out how they did that. It’s pretty certain they merely called an IRS office and got an agent. That is not advice you can rely on, particularly for a novel situation.

        The IRS routinely gives erroneous advice on the phone (phone reps have only 20 hours of training). It happens on completely routine questions 20% to 30% of the time (this is pretty consistent over time, see here, for instance: http://money.cnn.com/magazines/moneymag/moneymag_archive/1997/04/01/224332/index.htm. http://www.taxhelpattorney.com/articles/irs-incorrect-answers.html, and http://www.stopirstakeover.org/facts/irs-tax-preparer-wrong-25-of-the-time ). Given this history, it’s quite a stretch to expect a field agent to render a reliable opinion on a complicated question like this where no case law exists. It’s completely beyond their level of training and expertise. As this article indicates, the IRS giving bad advice does not absolve the taxpayer of responsibility.


        The people I have checked with are tax authorities, tax attorneys who are recognized experts, write in professional journals and teach courses. The post explains why this is a grey area and most important, why the IRS will not render an opinion on this.

        To clarify the “not render an opinion” I mean formal written opinion, which is the only kind you can rely on.

        The problem is the Strike Debt folks don’t know what they don’t know, which means specifically they don’t know the level of due diligence required on a novel tax issue. And I have gotten confirmation that my gut on this is correct, that no one involved has enough tax or complex transaction structuring expertise to recognize what is at issue here. One colleague worked on the Debt Resistors’ Operations Manual and has spent time with the folks around Rolling Jubilee wrote me: “None of them had any particular expertise on finance or law. They’re humanists, artists, freelancers.”

      3. Lambert Strether

        “No. We double-checked this with the IRS.”

        That’s not an answer. (1) The IRS gives bad advice to the taxpayer IIRC 20-30% of the time, but taxpayers are still liable regardless of the advice; (2) “No one can be sure until a court issues a ruling.”

        Can StrikeDebt honestly say that all risks in participating in its program have been fully disclosed to potential participants? Point me to a better statement than “we double-checked with the IRS,” please.

        * * *

        This story — and some of the defenses of it — remind me of an incident in the fracking world (too lazy to find the links right now, but they were in Campaign Countdown).

        A pipeline company wanted to demolish a trailer park on the Susquehanna and a local Occupy and the residents got together to resist it, which they did for some weeks successfully. (The Occupiers thought the facilty would pollute the Susquehanna watershed, and taking fracking as a whole supply chain, they are surely right.)

        Ultimately, however, the pipeline company increased its payout to the residents, and the residents asked the Occupiers to stand down and end the resistance, which they did. I think this is admirable. One might cry — especially if one has a comfortable home to go to — “But what of the Susquehanna?” But that ignores the human needs of the residents, to whom, after all, a payout and a new place might a whole lot (as things tend to do when you are very poor). If the Occupiers had continued to Occupy, they would IMNSHO have no longer been treating the residents as fully human moral agents, but as pawns in a political game. And surely if there is one thing we would all want from a reinvigorated political economy, it would be no longer treating people as things?)

        That’s why I think that full disclosure of the risks of participation in StrikeDebt is important. Occupy, if it stands for anything, must stand for participation on the basis of fully informed consent. I don’t see awareness of that issue by StrikeDebt advocates, and if I am wrong, I would like to be given a link to where the full disclosure is made.

      4. Lambert Strether

        The Rolling Jubilee FAQ is not publicly accessible; the link goes to a Google Doc, and I use my Google accounts as little as possible. I can’t find anything on their website, unfortunately. Could a publicly accessible version of the FAQ be posted, perhaps in the form of an FDL post?

        * * *

        I did find what looks like a draft here at “Debt Fairy Rough Draft FAQ and Links” with what looks like similar language:

        Q. When the Debt Fairy abolishes someone’s debt will this raise their taxes?
        A. No. We double-checked this with the IRS and a project like this does not meet the requirement to file a 1099-C Cancellation of Debt form and almost certainly have no effect on anyone’s taxes.

        Thomas Gokey
        The Art School in the Art School | Department of Wonder and Joy
        Syracuse “University” | VPA Foundations
        Time Arts | Two-Dimensional Creative Processes

        I’m not sure where this wording came from a search of the group discloses nothing.

    3. Enraged

      Sucks, huh?

      When are we going to Switzerland and the Caiman to get all that money the IRS can’t put its hands on? That would keep them busy for a minute or two, to calculate all the back taxes owed… How’s that for creating jobs?

    4. Lyle

      Actually for the gift tax you don’t pay anything now, its just when the time comes to file the estate tax return the exemption is reduced dollar for dollar. (Now if you have gifted away the estate tax limit you get to pay now). Note that in addition a tax an additional tax is due if you gift more than the 13k limit to a grandchild or other person in the second generation (a consequence of the generation skipping transfer tax).

  10. Ms G

    Despite my initial enthusiasm for this OWS Jubilee project, I’ve come around to the sobering conclusion that it is not only misguided but that it is only serving to fuel the market in junk/fraudulent debt (increased demand for junk leading in turn to increased uncollectible/unenforeable debts “suriving,” increased prices for junk because a new stuffee market is creating aggregate demand, etc.) and reward the hideous sector that is junk debt collection. The problem of tax liabilities inuring to the supposedly “saved” debtors is another huge problem.

    Given that OWS appears to have consulted with various lawyers and tax experts in launching this project (and had the Strike Debt Manual available to educate itself) it is puzzling why this went forward at all.

    I agree that mobilizing pro bono lawyers to start suing the debt collectors or defending the hapless defendants would be the helpful and smart way to go here. (I’m not sure that this is not already happening as most legal aid offices around the country have units that represent financially-qualified clients in consumer debt proceedings, including debt collection, personal bankruptcy, etc.)

    1. Phoenix Woman

      They have checked with the IRS and there’s no problem here.

      From the Rolling Jubliee FAQ:

      Q. How will this affect people’s credit ratings?
      A. Rolling Jubilee will make reports to one of the three credit reporting agencies that these debts should be considered paid in full. In all cases people’s credit scores should be improved, but the amount of improvement will vary from person to person depending on their specific situation. By the time someone’s debt enters the secondary market their credit score will have already been damaged. In most cases reporting that this debt is paid in full will undo some, but not all, of that damage.

      Q. When a Rolling Jubilee abolishes someone’s debt will this raise their taxes?
      A. No. We double-checked this with the IRS and a project like this does not meet the requirements to file a 1099-C Cancellation of Debt form and will almost certainly have no effect on anyone’s taxes.

      1. Ms G

        I think you were responding to a different poster. The issue I referred to was the one of the Jubilee project encouraging the growth of a fraudulent market in uncollectible/unenforceable debt by creating a new buyer (OWS) for the debt where it is unclear (at this point, anyway) whether any due diligence is being performed prior to purchase of the debt to determine how much of it is phony to begin with …

  11. aletheia33

    if the questions and discussion taking place here today around this post by yves were to spread to the mainstream media, this alone would serve to change the public conversation about debt, just as OWS changed it about income inequality in a very short time a year ago. too many people are clueless about their own debt and the extent of their ability to extricate themselves from it, and at the mercy of a captive media devoted to keeping them completely in that dark.

    the debt resistor’s manual is great for this, but how do people find out about it? yves’s earlier mention of the importance of spreading that knowledge still applies.

    yves’s concerns and caveats here are a welcome investigation, as usual, of a matter the media is not bothering to take as seriously as she is or treat in the proper depth she is taking it to. perhaps with this discussion she has begun, we and others can contribute to useful refinement or redirection in the strike debt effort. a high-end $$ lawyer getting struck by amazing grace–what a lovely possibility! who knows, maybe someone here knows one of those lawyers and can give a nudge in that direction.

    meanwhile, i hesitate to underestimate the power of a “gimmick” like this. to be able to access as much media space as strike debt has so deftly, quickly done with their rolling jubilee counts for a lot. you can make documentaries till they come out your ears but how do you get the “cnn money” and bloomberg business audience to watch them?

    just getting the shills and stenographers to let some light in and even mention the issue of massive unpayable debt and acknowledge that such debtors are more victims than deadbeats, by emphasizing starting with medical debt, is quite a coup already IMHO. now let’s build on that momentum and do further due diligence on the planned actions, and come up with more useful suggestions.

    i believe that one of the early actions done in by slavery opponents was to buy slaves and free them. the movement evolved. those who know their history of that era please correct me or expand if you can. it’s early days yet in the current movement. and notwithstanding strike debt’s deliberate use of the term “abolish”, i hope that a better analogy might be found than one to human trafficking; seems it could serve to cloud the issue a bit, whoever’s using it.

    yves’s contribution here may prove crucial. thanks again for the light, the logic, and the investigating!

    1. Susan the other

      RJ is already an effective tactic. It is great exposure and an opening for people like Yves who really understand the nuts and bolts of the debt debacle to explain in detail the fraud, etc.

      1. RanDomino

        It’s effective because it’s being wrong may expose laymen to people who know what they’re talking about? Why don’t we just promote the experts? It’s not like anyone is checking out Rolling Jubilee because complicated debt-buying schemes are sexy. They’re into it because it’s marketed well.

    2. CLAJR

      As one commenter remarked, the RJ organizers themselves seem to accept that the project won’t make much of a dent in overall debt (Pamela Brown use this point on Democracy Now to counter the argument that RJ could unintentially support the market by driving up prices.) So that leaves the symbolic value of the project, which many folks here seem to believe lies in publicizing the issue in the mainstream press, which would lead to… I’m not sure what. These kind of street theater tactics are often focused on “raising awareness” via a news media that we all pretty much agree is captured by corporate interests. But if the raised awareness has no particular agenda to latch onto, it can’t effect change of any type.

      The issue about taxation, while it may seem an unlikely scenario to some, doesn’t seem so to me. I’ve been dunned and run round in circles by the IRS for much less.

    3. Lambert Strether

      If the risks to participants in the “gimmick” are not fully disclosed, then it’s unethical, regardless of any “greater good” it may achieve.

      Pragmatists might consider how that would put the Occupy brand at risk, if (when) the IRS actually issues an opinion, and “But I checked the StrikeDebt FAQ!” doesn’t work as a defense in court, and they end up losing their house, say.

      I’m not saying that StrikeDebt doesn’t have a lot of potential as a political weapon, but again, people should know what they’re signing up for. This isn’t a performance piece or Candid Camera.

  12. Jack E. Lope

    If a lender issues a 1099 for the balance of a loan (laden with all the fees they can muster) *and* takes possesion of the asset, do they declare the value of that asset as income at the same time?

    When my sister performed a short sale of her house, I assumed that transaction would create a capital loss for her, and that capital loss would offset any “income” derived from the related debt forgiveness.

    In her case, it became a moot issue due to the temporary relief provision mentioned in the article – but it left me wondering about the tax accounting: In a foreclosure or short sale, on whose balance sheet do the losses accrue?

    1. Kokuanani

      When it’s your house [residence] whose sale has resulted in a loss, you DON’T get to take advantage of that loss like you would the loss on a capital asset [e.g., stock].

      I know this because when we were contemplating putting our house on the market, at a big loss, naturally, I talked with our accountant, anticipating that we could make some lemonade out of this lemon.

      Nope. Not gonna happen. The “favorable tax treatment” is limited to the lords of the manner that have stocks, bonds and other assets which they buy and sell. Not the plebes whose only asset is their house.

      Seemed quite unfair to me, since the IRS was only too happy to tax me on the GAIN I realized on the house I sold to purchase the current [now losing] one.

  13. Aquifer

    Another example of the ongoing “tension” between the concept of public policy v private charity in the healing of our common maladies. Are these problems problems of “the individual” or problems of society? And are the solutions best administered one at a time by one at a time, or dealt with collectively as a matter of policy?

    Obviously, though it probably shouldn’t be an either/or but a both/and, it still raises the issue of when there isn’t unlimited amounts of “energy”, however you define it, to spend, where should the emphasis be …

    I agree with aletheia that even if this “gimmick” may have little to do with how much debt is actually resolved, it is still useful for its publicity value – but the question remains, IMO, to what extent is it a “squirrel!” in what needs to be a very serious conversation in what actually needs to be done ….

    1. aletheia33

      @aquifer ‘the question remains, IMO, to what extent is it a “squirrel!” in what needs to be a very serious conversation in what actually needs to be done’.

      well put. i hope some of that conversation can take place here.

      many lessons will have to be learned if a strong movement is going to get built, including how to avoid the predation of bottom feeders who would like to get a few more meals for themselves out of your fledgling movement and are adept at protecting their bottom feeder “status”.

      they well understand how indispensable they are to the status quo, and will stop at nothing to keep their entitlement to make whatever they can out of the junk they buy. wait, that sounds familiar! weren’t there some people who sold their uncollectible debt to the american people not so long ago–and darn if they didn’t manage to get a far better price for it than pennies on the dollar? how could that happen? well, someone has to do the dirty work to enable TPTB to wash their hands of, and get their “legal” recompense for, all the trash debt they are obligated to speculate in as they perform their public service of keeping the world economy from exploding.

      the levels of apparent criminality have got to be kept very graduated, from the appearance of white at the top (elites’ impeccable, condescending “manners”, philanthropy, and the like) down to black at the bottom. in between, you have the game of illusion. the more apparent distance/levels you can fake between the white and the black, with fake levels of not just monetary operations but also supposed moral integrity, the harder it becomes for the victims to discern just where the “real” criminality begins and just how they got injured.

      fortunately, bill black is still showing up to help us with this and explain very clearly how the needed discernment, as practiced by trained, committed regulators, need not be at all as hard as TPTB would like us to believe.

      occupy will have to learn how to cope with all the sinister forces in play in a society whose moral compass is broken.

      more and more people will come to understand the lack of difference between the criminality at the “top” and at the “bottom”, recognizing how the small-time and the elite criminals are all feeding on the same victims. they are working their way up the food chain together. as they chew their way further up into the middle class, awareness will spread.

      great that yves is illuminating the full ramifications and difficulties of activism that challenges entrenched $$ and tax law. maybe a more civil disobedience oriented approach could somehow get traction where such “law” is unjust. are there any actions other than conscious, highly public, enlightened civil disobedience that can prove useful, given how widespread is the current erosion of social trust?

    2. Susan the other

      aquifer, when you say the question is between public policy v private charity I think it is a misdescription. I think it is between public policy and private policy because we currently have no, or effectively useless, public policy – and therefore everything is,for lack of a better term, private policy. An oxymoron in a democracy. Public policy, if we ever achieve it, can solve all the inequity.

      1. jrs

        I think Strike Debt and maybe OWS in general is trying to walk the line between charity and radicalism. Between the private and the public in any meaningful sense, by which I mean activism, because after the latest election it’s hard to see voting as meaningful. I think they got the timing right, everyone demoralized by the uselessness of elections, and Rolling Jubilee comes along with a perfectly timed picth of something you can do. But how much good does it do? Up in the air. More good than voting, which perhaps is saying nothing.

  14. Patrick

    I’m also wary of OWS getting involved in the very slimy secondary debt market. I hope they know what they are doing, inspecting those debt portfolios carefully. They are mostly garbage: debts of the deceased, debts that have already been discharged in bankruptcy, debts that have been disputed, etc. Creditors often sell a single account to multiple purchasers, complicating credit reporting issues.

    Purchasers never get the origination documents, so your chances are pretty good contesting the debt at this stage whether it’s valid or not. Maybe Occupy should devote resources to that effort.

    I like the idea of mass default. Or elimination of the secondary market. No head, no headache.

  15. juliania

    Yesterday I was listening to a good discussion about how communities resist big corporations which have the ‘right’ to pollute their environment – by passing local laws that prohibit such activities. Now, one can argue that these actions by enlightened communities go against state law, against Federal law, and even against Constitutional law. However, there is a real necessity for such actions to proceed, and they are being successful in that the corporations, one, often don’t want to press the issue, and two, are getting an up front education on the resistance they face in continuing these practises.

    The way the municipalities have been successful has been in framing their new local laws in ways which challenge the very attitudes inherent in the old laws. It seems to me this could and should also be happening with respect to the tax laws that Yves holds up as a stumbling block to the movement here.

    It’s all about readjustments, and if a law doesn’t work for the people it should be changed. The tax code is now so incomprehensible that simple folk like me worry about every being able to fill out their forms correctly, so we are completely at the mercy of the elite. If OccupyDebt and the Jubilee shine a light on all of this, I don’t think it is a gimmick at all.

    1. jrs

      Of course pretty soon it will be against international trade law. That’s what the Trans Pacific Partnership is about, making things like local environmental law meaningless. But the fight is worth it while it can be fought.

      Agree about the tax system, a never ending nighmare of mine as well.

  16. Phoenix Woman

    The Rolling Jubilee folks have dealt with this issue. From the FAQ:

    Q. When a Rolling Jubilee abolishes someone’s debt will this raise their taxes?
    A. No. We double-checked this with the IRS and a project like this does not meet the requirements to file a 1099-C Cancellation of Debt form and will almost certainly have no effect on anyone’s taxes.

    In addition, one of the reasons that OWS and Strike Debt are allying with various churches (which are of course non-taxable) is to avoid any tax issues. (Think of why they call this a “jubilee”: The very word comes from the King James Version of the Bible, and describes the practice, common in ancient cultures of the Levant, to forgive debts on a periodic basis.)

    As for any lingering concerns over tax issues, they sound as if they are easily handled. Per FDL’s Cindy Kouril:

    Some have hollered that it creates a taxable event. However, if OWS is even more clever, they will contact the debtors, and stipulate to “settle” a pre-litigation case over the debt and the debtor will waive counterclaims and defenses in exchange for cancelling the debt. Since value is given, no taxable windfall. Since the most deeply discounted distressed debt has already passed through the hands of prior debt collection agencies, who no doubt have engaged in sketchy debt collection practices, it will not be a farce to say the debtors have counter-claims and defenses. This idea came from Masaccio.
    OWS did a test run of this concept and was able to buy $14,000 of debt for only $500. This model should be used by the federal government to force the modification of mortgages, instead of bailing out the big banks, TARP money should have (and still could be) used to buy up the mortgages directly, reset the principle balance to reflect the current market value of the homes, and then reset the payments to fit the homeowners’ current incomes. Does that mean some homeowners, even with principle reduction, will end up with VERY long debt repayment terms? Yes, but it also means they can now sell those houses and get out from under if they choose, or they can pay for a long time and slowly rebuild equity.

    More can be found at http://rollingjubilee.org/

    Questions? Just email rollingjubilee@gmail.com and see what they have to say.

      1. Yves Smith Post author

        I have responded to you twice. This now amounts to campaigning on my thread.

        Cynthia Kouril is NOT a tax lawyer. Tax is a very specialized area. Looking at her background, I don’t see anything that suggests she has ever deal with the issues that come up in novel tax matters (as in, worked on deals where she would have been seen what goes on when dealing with novel tax issues, and thus would know process, if not content). The individuals I have consulted with are recognized experts on tax, publish journal articles, and are invited to lecture on tax topics.

        I e-mailed your post and got a short response from one expert who is traveling today: “IRS can’t rule on gifts so I don’t buy it.” I expect to get the longer form version in the next few days.

      2. Lambert Strether

        Here’s a suggestion that should be very easy for you to achieve if what you say is true: Get a reputable tax lawyer to go on record supporting your interpretation and put the letter on the site.

        * * *

        And again with the “We double-checked.” Three times zero is zero. Clue stick: Talking points work with repetition. Serious analysis does not. Which are you doing?

  17. lyman alpha blob

    Yves, you had taken me to task a while back for suggesting that people simply ignort the debt collectors, mentioning that I had ignored the possibility that they could be taken to court and have their situation made worse by doing as I suggested. I didn’t want to belabor the point I was trying to make at the time (albeit not very clearly), but in light of this post I will say that I think you are spot on in your asssessment here. This idea would be much better in my opinion if OWS fought the debts in court as illegitimate rather than simply forgiving them, since by doing so they seem to be playing right into the credit card company’s hands. Clearly this adds to the market for buying bad debt, encouraging banks to continue to lend out money they know has little likelihood of being repaid.

    I did laugh off an effort from a collection agency coming after me for a small and quite old debt from a company that no longer exists, but I do live in a state where they can’t do much about it. But I remember reading some detailed articles in the Boston Globe a few years back about what it’s legal for collectors to do in Mass and it was apalling.

    The jubilee is a nice symbolic effort, but much better to challenge the legitimacy of the system with an eye towards some serious reform.

    1. Carla

      It seems to me that buying the debt and canceling it DOES challenge the legitimacy of the system.

      Also like the slogan “You Are Not A Loan.”

    2. Michael

      In the last year MA passed new rules for debt collectors. They did a good job defining what is needed in order to validate a debt when a consumer requests it.
      The could have gone further in other areas of the law, but there have been imporvements since the Globe series.

  18. RanDomino

    Rolling Jubilee is incredibly sketchy. Their website is way too slick to not be well-funded. It’s got a star-studded telethon and friendly media exposure up and down the board. It’s all rolling out too quickly and too efficiently to not trigger any alarms. Especially considering it’s such an incredibly stupid idea (over $150,000 to throw down the toilet, while Occupy Sandy is desperate for supplies?!).

    Does anyone know about this Andrew Ross guy? He seems to be honest (a little vapid and smarmy maybe), but I get the distinct impression that there’s a slick marketing team behind this, and that it’s basically a scam one way or another (maybe they’re charging generous handling fees or hiring themselves as consultants?).

    1. diptherio

      “Their website is way too slick to not be well-funded”-Randomino

      That’s the same line they used to try to smear our local occupy. The thing is, modern technology makes building a “slick” website pretty easy (especially if you’re an unemployed computer programmer). And guess what, a lot of people support Occupy and are willing to donate their time and money to its cause(s). Some of them happen to be celebrities, some of them happen to have a nice stash of dough, some of them even know how to design a slick-ass website.

      I know in your world people never do anything out of sheer goodwill and human decency, but a lot of us actually do. Despite what you may have read in Ayn Rand or Neo-Classical economics, most people aren’t selfish pricks. Probably hard for you to understand, I know.

      1. Lambert Strether

        1. Randomino knows I’ve beaten him about the head and ears on some strategic disagreements, so he will I am sure agree with me when I say I can attest that your charge (ad hominem, but leave that aside) that “in your world people never do anything out of sheer goodwill and human decency” is not true. And perhaps that’s exactly why he’s making the point that Occupy Sandy needs funding?

        2. I’ve done some web site development, and I took a quick look at the site. (a) it’s not a simple WordPress site (no WP credit, as here); (b) From their git site: Website for Rolling Jubilee. Uses Google Drive API via Miso to pull content from a spreadsheet and populate Handlebars templates. Fully-responsive layout based on Bootstrap.” Snark on “modern technology” aside (and for all I know everything was donated, so no funding issues arise) that took some level of technical expertise to do. It wasn’t your local Occupy group throwing up a FaceBook page or using Wix.

        1. jrs

          Um techies with certain political leanings (and even though most technies lean only too conservative, there are definitely radicals out there) would gladly help out. It is what sustains the free software and open source movement afterall.

          1. Yves Smith Post author

            I’m not sure how far that goes. The artists donated who did the card deck for OWS still needed a mini-fundraiser for printing costs and for artist time. Similarly, the credit union project is stymied because the dev people want/need $99,000 and other people think they should donate their time. Admittedly, this is less development work than the Strike Debt site was, but I’m just sayin’ you can’t necessarily conclude this wasn’t paid for, and professionals probably should be paid for their time up to a point.

  19. Stratos

    Rolling Jubilee is a bad idea because it is an attempt to play within a decayed and abusive system. I’m glad Yves pointed out the potentially explosive issue of tax law.

    Yet, we have to keep in mind that the Occupy Movement is still very young and it is reasonable to expect them to cast about for a winning formula. In the meantime, they will try many tactics that that don’t work to find some that are effective.

    I think the most effective strategy for Strike Debt is a true debt strike. I think there is an untapped pool of potential allies for Occupy/SD over this issue: young persons emeshed in student debt, their parents who co-signed for the debt and are also on the hook and Boomers who still owe on this odious debt and are subject to garnishment of their Social Security checks (until Obama’s Great Betrayal takes that from them, too).

    A debt strike would place the pain on the the criminal banksters and their partners in crime. Nothing beats well planned mass action.


    I have dealt with this a lot in my tax practice in recent years. IF in fact, we are talking about CR Card debt, it would seem to me that O.Debt would be obligated to issue the 1099C for cancellation of debt *income.* [All gift issues aside]
    But here’s the deal– most of my clients (esp. Homeowners) are INSOLVENT. Taxpayers can exclude this income to the extent of their insolvency.
    U.ncle S.ugar has a worksheet on page six here:
    Doing the worksheet is important because of late they have been questioning most of the returns I have prepped claiming this exemption.

    1. Steve

      Finally! Some mentions the insolvency exemption. Not sure why Yves’ tax experts failed to mention this. I would bet this applies to most of the people whose debt is being bought. If not, then OWS should be buying someone else’s debt.

      1. Yves Smith Post author

        The reason I didn’t is operationally it would be a nightmare for OWS to figure this out, as to whether someone is insolvent or not IN ADVANCE of buying the debt. In many cases the debt collectors can’t find the named party. If they can, in the overwhelming majority of cases they are avoiding calls about the debt. And then OWS would have to get the borrowers to do worksheets. This is an absolutely monumental task. I’m not even sure what information about the borrowers is made available to the debt collectors. The reason it is sold so cheaply is in part that it is a pig in the poke that they are buying, and OWS is not going to be able to get more disclosure than market norms.

        1. Michael

          The tax thing is not that big of a problem in my experience. Besides, if the target participant is solvent and owes the tax on some, or all of the forgiven debt, it is because they saved money and cleared the bill(s). This type of person would likely be solidly middle class.
          The organizational attributes of this are what would be a nightmare.
          Getting all jubilee on random debts inside a portfolio purchased would be, in my opinion, a waste.
          Say the target debtor has 5 debts with 5 different creditors. Do you pick one and leave them with 4 debts still suffucating them? Where is the jubilee in that?
          You want to buy all 5 of the target debtors accounts? Good luck getting all 5 original creditors to carve out single debts from a portfolio to sell to you.
          You want to buy them from someone who already puchased them? Still a chore, but at least more plausible.But how do you get creditors and debt buyers to go out of their way to aggree to this when your messaging calls them on the carpet? That is not likely.
          OWS can try to hit up some of the big buyers like Encore Receivables/Midland Funding, Resurgent Capital, Portfolio Recovery, and a few others. I just do not think this is something that would work out on a large scale.
          Maybe it doesnt need to go large to be effective.
          If OWS wants a captive audience to cherry pick target debtors from on this, they could connect with a low income legal aid office. They may even find a credit counseling organization who would filter one of the dozens to hundreds of people they talk to each day. Roughly 70% of callers cannot fit inside the stricture of a credit counseling plan. Set up a criteria for target participants from some of the rock meet hard place files found.
          I can see the timing of this being great, or terrible. The CFPB starts crwaling up the skirts of debt collectors and debt buyers on 1/2/13. The field investigation guide shows what they will be looking to spank on. The list is fairly impressive and will have already begun to drive up operational costs for any collector/buyer bringing in 10 mil or more annually.
          There have been very serious people discussing amendments to the FDCPA for a couple years now. Those changes will come.
          A serious effort and media coverage can help bring attention, or go off like a fart in a skillet.

  21. Carol

    Aside from tax laws which might derail the whole thing, it really wouldn’t solve anything because people are so stupid they would simply buy themselves back into debt.

  22. Chris Darling

    Yves, I generally like your analysis on most financial issues but not on this one.

    On the one hand, you say that it will bid up the price of debt and, on the other hand, you say that the sums that Strike Debt is raising is too small to have any real effect on reducing the amount of debt. If it is too small to have any real effect, it is also too small to bid up the price.

    Second, and more importantly in my opinion, you are taking this all too seriously. The only way to look at Strike Debt is as a symbol. Obviously, it will never do more than eliminate more than a pittance of debt. But by buying it up for pennies on the dollar, they are showing how ridiculous the system is.

    As for tax consequences, my response is bring it on. I would love to be a lawyer defending some one whose debt has been forgiven by Strike Debt. Just imagine how this will play out in the media or, better yet, on tv talk shows. The IRS will look really stupid if they try to enforce this. It will just blow up in their faces but of how it will look to the public.

    My first reaction, and my wife’s as well, when I heard about this, was to laugh. And that is most people’s I am sure. This is really a bit of theater but it has the potential to be highly educational theater. If debt is sold at five cents on the dollar, that means that the seller thinks it is uncollectable. If enough people who owe credit card or medical debt figure that out, the system cannot survive.

    As you have noted, most people who have credit card debt or medical debt do not know that they are actually in a fairly strong position if they do not panic. Most get lost in shame and/or fear and because of that do not think clearly. In my mind, Strike Debt could teach a lot of people that it is not the end of the world and there is a way out if you run up a lot of debt.

    I strongly support what they are doing.

    1. Yves Smith Post author

      If you go back and read my post, I clearly distinguish my views: that if anyone realizes OWS is buying, they are going to give them a sucker (inflated) price regardless. If they enter the market on a large enough scale, they could distort prices overall and change market practices adversely (as in lead banks and debt collectors to peddle even worse debt), but it is more likely that this will be too small scale to make much of a difference. Please tell me where the contraction is.

      Your final comment basically says you are shooting the messenger. You like the idea so you don’t want to hear that it has problems. If the person can prove insolvency, that’s fine, that is an existing out under the law.

      OWS is buying this debt blind, and they don’t know the financial or personal situation of the people whose debt they are forgiving. It’s hard to justify a break for someone when people who borrow money from family members don’t get that break.

      That does not mean that it does not have problems. And I did suggest better ways they could go about doing this, so there are other things Debt Strike could do that would be productive. I very much approve of their Debt Resistors’ Operations Manual and suggest they build on that.

      1. vlade

        As much as I dislike Michael Moore for being a propagandist, I believe that a good propagandist is exactly what OWS should get. Spending the money on an effective movie would be much better than DS randomly buying trivial amounts of debt.

    2. vlade

      Actually, this post is exactly the reason why I rank NC much much higher than any other blogs/sites.

      It calls a dumb idea a dumb idea no matter where it comes from.

      It doesn’t mean it catches everything etc. etc., but (as far as I can tell from the years of reading it), Yves knows that repeating an ideological argument that is easily refutable is one of the worst ways to further your cause. It’s better to shoot it down before it takes off by friendly fire than let it go out and be the weak spot that takes down the whole edifice in a real enemy engagement.

    1. skippy

      Yep… its like paying off the prison guards for better treatment, yet, your still in prison… still…

      skippy… and the warden always gets his cut, always…

  23. S.

    Would it be possible to void $12,999 in debt and then pass the remainder on to a collector who agreed to pursue the debt justly?

    1. Yves Smith Post author

      Look, there may not be a problem with this. But Debt Strike is saying there is no problem, when in fact this is an unknown. The IRS cannot opine on whether this is a gift, that can only be interpreted judicially. So I’d bet whoever from the IRS gave them this view was a low level person who did it verbally and didn’t know the statutes or case law.

      So if there turns out to be no problem, great. But if there is a problem I don’t see a ready solution. If it’s not a gift, then the debt forgiveness is taxable to the borrower. In many cases they won’t have enough income for it to result in liability or can use the insolvency out, but in some cases it would. And it would be very difficult, perhaps impossible for Strike Debt to figure that out in advance of buying the debt (see this comment: http://www.nakedcapitalism.com/2012/11/occupy-wall-streets-debt-jubilee-a-gimmick-with-tax-risk.html#comment-919860)

      1. S.

        Did you mean to reply to me? Also, in my original post I meant to write $12,999 per person, as it’s written now it looks like I’m suggesting that RJ should pocket most of the money.

  24. Anon

    And so Yves’ advice boils down to – continue to work within the system, rather than trying to beat it at it’s own game because…it’s never been done before and there may be some risk! OWS should not do anything risky. Wait until there is established case law before trying to help anyone. And if you can’t help everyone to the tune of billions of dollars, don’t even try.

    Thanks. Myself, I’m glad that Elizabeth Warren ignored your previous advice and is now elected to the senate.

    1. Lambert Strether

      Who’s taking the risk? I’d say it’s the person who got deked into entering into the program and then got hammered by the IRS because an OWS-branded program got sloppy. No thanks.

  25. Ché Pasa

    Interesting to see the level of confusion and misinformation regarding issues surrounding debt and the actions of Strike Debt to relieve a tiny portion of the burden of debt.

    Just the idea of doing something like this seems to strike panic and fear in some people — apparently because Strike Debt uses weaknesses in the debt-system to mess with that system.

    It’s that old devil “uncertainty” once again raising its ugly head.

    Household debt relief is essential if we are ever going to get out of this Endless Recession, but the policies in place from the outset have precluded it. That says to me there is no official interest in or intent to “get out” of the Endless Recession — because the People Who Matter are making LOTS of money under the current circumstances.

    Strike Debt isn’t going to change that. But what it can do is highlight the ongoing problem of crushing household debt and show that it is possible to relieve it and in the process, threaten to upset the debt-industry’s apple cart.

    We are not in this situation because nothing can be done, we are in this situation because policies are in place which preclude any official action to relieve household debt. The interests that own the government, after all, want to increase, not reduce the debt burden of the masses.

    As Chris Darling says if the IRS wants to make a taxable income issue of this, let them. Given the infinitesimal scale of Strike Debt’s actions to date, seeing the IRS go after them and the debtors they are trying to relieve would be seen as petty and overkill and completely inappropriate under the circumstances.

    1. Yves Smith Post author

      You are missing the point that if there is a problem, Strike Debt will have made matters WORSE for the people it is proposing to help, and now its allies are cavalierly blowing off that issue. Or worse, making them victims to advance the cause when they did not volunteer for that role.

      Is Strike Debt proposing to pay the tax bills of the people who get stuck with tax bills if the IRS takes interest? Is it proposing to pay the bills of tax attorneys to fight this? Does it have the foggiest idea of fighting with the IRS on a novel issue costs? If they haven’t checked this out, they haven’t been responsible to the people they say they want to help.

      And what about the stress to these people, in addition to the financial risk? I don’t know about you, but I get upset even when I get little tax notices from the IRS.

      No one with serious money would enter into a deal with tax risk like this yet you are proposing to foist this on little people. How caring and responsible is that?

      1. Ché Pasa

        “If there is a problem” — at the moment there is none, nor is there any sign that one will emerge, at least not a tax problem such as you propose.

        If it does, are you then claiming that the only way to make the IRS back off is to take them to court with high priced attorneys who won’t under any circumstances act pro bono? There is no other way? None? Really?

        There are risks and hazards in every action. The fact is that there are too many policies in place which hamstring and burden households with crushing debt, and those policies are the real problem. Strike Debt is using weaknesses in the debt-industry (including real weaknesses in the debt-collection industry) to throw a little bit of sand in the gears. Hypothetically, what Strike Debt is doing and promoting could make things worse for households suffering under the crushing burden of debt, but it hasn’t done so, and there is no sign that it will, at least not in the short term.

        Where is there any action at the policy level to provide substantial household debt relief?

        1. Yves Smith Post author

          Wow, this is an astonishing comment. Do you run an all cash life? Or are you a student and have never filed a tax return? Seriously, I can’t believe a grown up wrote this.

          The short answer is yes. With the IRS, if the issue is interpretative (they read the regs one way and you beg to differ) the only way to dispute that is in court. The IRS can and does attach bank accounts and garnishes wages. The only thing they can’t get is retirement accounts. Similarly, if you disagree with audit findings, you have to go to court and the burden of proof is on you. There are circumstances in which you can shift the burden of proof back onto the IRS, but you have to have kept good records and cooperated with the IRS.

          You can get the IRS off your back if it’s a minor clerical error on their part, like they didn’t credit a payment correctly or thought you sent a return in late and you can prove you mailed it on time. But absent that, good luck.


  26. Lambert Strether

    Re 1099-C… As we know, the banks manage their databases in a totally trustworthy manner, and therefore to find out if a 1099-C has, in fact, been issued for a given debtor’s debt, all we need to do is ask the bank….

  27. James

    There’s an awful lot of speculation in this piece. It does seem overly cynical and I’m not sure why. It seems to miss the point – who cares if the price of debt goes up? It’s not worth any more, it’s just more costly to the real bottom feeders, and a little extra pocket change for the big banks. People need to be made aware of how the system works. That’s the point.

    In the spirit of OWS, trying to help some people out by not subjecting them to the harrassment and/or legal actions they would otherwise face is worthwhile, even if it can’t help everyone and doesn’t change the system immediately or directly.

    Most of these people are probably poor enough that even if you add the forgiven debt to their income, they still won’t owe any tax. If they make enough to be paying federal income tax, they might be willing to pay a fraction of their debt in more taxes in order to be relieved of the total debt. They’re still going to owe a lot less, and the IRS isn’t as bad as people think as long as you’re not deliberately trying to defraud them. They have more power in criminal cases but are much generally less abusive than debt collectors.

    They could also sit on the debt that has little to no value and just never try to collect – don’t report it and don’t harrass anyone one over it. Or, maybe they could “lose” the record of the debt. The real downside of bad debt is the credit reporting, legal actions and harrassment. If you can eliminate all of that, what does it matter if it’s officially “forgiven”? It’s virtually the same, but wouldn’t require IRS reporting.

    Strike debt should problably just ask the debtors what they want done. Problem solved.

    I think this is a great idea. It will be interesting to see how the industry reacts. In order to stop it, they would have justify some regulations that try to ban any sort of kindness and only allow nastiness. Imagine what that law would look like, and how it would play in the media and with the people. There is really not much downside that I can see.

    1. Yves Smith Post author

      Please read these comments above. It isn’t practical to ask the borrowers what to do, operationally, plus these people have been ducking calls from collectors, so why would they talk to Strike Debt? And you can be sure collectors will start pretending to be Strike Debt to get people to take their calls, even if Strike Debt were to get enough volunteers.



      As for the price of debt matter, let’s see, if you wanted to reduce sex trade in women by buying women out of sex slavery and setting them free, would you care if the prices of women went up? Yes, because it would encourage the sale of more women into sex slavery. Same issue here. This encourages banks who have debts more than 180 days old to sell them (encouraging predators to go after it) rather than writing it off (which means no hounding of borrowers if the money isn’t there).

  28. Lambert Strether

    diptherio writes:

    The tax issue sounds like it could be hairy [for whom?], although a public battle with the ever-so-popular IRS might turn out to be another positive brand-builder for Occupy

    The grammar of this statement is a super “tell,” I think. “Hairy” for whom? The real issue is whether participants in the Debt Jubilee program are fully informed of the risks.* Phoenix Woman’s constant repetition of the same talking point from the FAQ does not inspire confidence in that regard; in fact, it suggest that the DJ bench is analytically weak.

    NOTE * “Yeah, I went into this thing because I wanted to get some debt written off. I didn’t do it to become a positive brand-builder for Occupy, especially now that the IRS is coming after my house.” Is that really the kind of juicy quote we want to engineer? To say nothing of the ethics of the matter?

  29. cripes

    There may be pitfalls in executing what is otherwise a useful, albeit, symbolic assault on debt slavery. Occupy did lose many battles in their initial phase but we can probably agree they have not lost the war. Public perception is powerful and destroying legitimacy is crucial. RJ seems flexible enough to take multiple paths, while OC Sandy, anti-foreclosure pursue theirs. Damage may be done to the vile collection market and a parallel legal front against creditors is a solid idea. Let’s not write off novel ideas just because they don’t fit prior practice and legal niceties. We need some mold breaking and occupy has been a breath of fresh air in that dept. Or, we can go back to writing letters to congress-horses and voting.

  30. cripes

    One more thought: occupy has been almost alone, and quite shrewd in framing activism as inseparable from helping debt-or hurricane–victims, integral to their message and practice. This raises. An alternative to broken economic system, showing the people that TINA is false. Real important.

  31. Matt

    You can purchase student loan debt. I looked into this in the past. http://www.debtconnection.com/moreinfo.asp?6215 Would their be more tax issues if they just sat on the debt and never collected? Would a possible solution be if they gave the debtor the option to pay any taxes to have the debt “forgiven” and taken off their credit report. If this movement did get really huge they could force the price of junk debt to rise and potentially slow down these vulture companies. 160,000,000 working class all give $40/month for a year, they could purchase all 1.8 trillion student and medical debt, that is if they could get it at 5%. It is an interesting thought to think that in one year the middle class could cause severe damage to the whole system, whether it turn out good or not.

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