forgiven debt http://www.wisebread.com/taxonomy/term/11326/all en-US Downside of the Rolling Jubilee http://www.wisebread.com/downside-of-the-rolling-jubilee <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/downside-of-the-rolling-jubilee" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/5040430171_2ab0f60994_z.jpg" alt="hands" title="hands" class="imagecache imagecache-250w" width="250" height="150" /></a> </div> </div> </div> <p>As a media-savvy ploy to shift public opinion on the debt problem, the Rolling Jubilee may be a brilliant PR move. It's probably not much real help for debtors. (See also: <a href="http://www.wisebread.com/how-debt-fools-people">How Debt Fools People</a>)</p> <p>Are you familiar with the <a href="http://rollingjubilee.org/">Rolling Jubilee</a>? What they do is use donations to buy up distressed debt for pennies on the dollar, then forgive the debt and send the debtor a letter telling him how to get started cleaning up his credit rating.</p> <p>As public relations, this is brilliant. It highlights the way lenders and collection agencies swap these debts around for pennies on the dollar &mdash; but won't let the <em>debtor</em> pay it off for pennies on the dollar. It also engages the public in a discussion on the <a href="http://www.wisebread.com/wage-slave-debt-slave">unfairness of our current system of debt</a> and the crushing burden weighing down the poor, the sick, the young, the troubled, and the merely unlucky.</p> <p>As a way of actually relieving debt for actual people, it doesn't do much.</p> <h2>Too Little Help for Too Few People</h2> <p>Any debt that can be bought up for pennies on the dollar is debt that was already long ago written off as uncollectable.</p> <p>That doesn't mean it's not a problem for the debtor. The debt's presence on their credit report probably makes it impossible for the debtor to ever get their finances cleaned up. It doesn't just make it impossible to borrow money; it makes it tougher to find a place to live, find a job, get insurance, even open a bank account. (If that last applies to you, check out my posts <a href="http://www.wisebread.com/new-tools-for-the-unbanked">New Tools for the Unbanked</a> and <a href="http://www.wisebread.com/making-direct-deposit-safe-for-the-garnished">Making Direct Deposit Safe for the Garnished</a>.)</p> <p>It does mean it probably isn't the debtor's biggest problem. Forgiving $1,100 originally charged on some credit card is great, but it does nothing to keep the electricity turned on or stave off foreclosure or cover the health insurance bill.</p> <p>So from the debtor's perspective, it's more a tease than actual help. &quot;Oh joy! Kind strangers have swooped in and solved my eleventh most pressing problem!&quot;</p> <p>It also helps too few people for the debt reduction to have any societal effect. A really sweeping reduction in the amount of debt that all heavily indebted people owed would change the whole economy, unleashing all sorts of activity from people previously trapped by debt. (Unleashing spending, of course, but not just that. It would also free people to be more entrepreneurial, if they didn't have the relentless burden of monthly payments.)</p> <h2>Pernicious Effect on Debt Value</h2> <p>This, I think, is where the Rolling Jubilee does real harm.</p> <p>A lot of the debt that has gone into collections isn't even owed. This can happen a lot of different ways:</p> <ul> <li>A legitimate debt was paid in full, but is still on the books due to an error by the lender.<br /> &nbsp;</li> <li>Debt that was illegitimate from the start, such as money borrowed by an identity thief.<br /> &nbsp;</li> <li>The lender has gotten confused about who owes the money and is dunning the wrong person.<br /> &nbsp;</li> <li>The debt was discharged in bankruptcy.<br /> &nbsp;</li> <li>The debt is disputed, such as when a shoddy product is returned, but the seller refused to credit the account.<br /> &nbsp;</li> <li>The underlying debt is a trivial amount &mdash; a $10 late fee &mdash; but has blown up to a large sum due to additional fees and penalty interest rates.</li> </ul> <p>Most of those cases could be sorted out if the borrower (or supposed borrower) knew their rights. Most could be ended with a simple letter along the lines of, &quot;I don't owe that money. Either send me proof that I'm wrong or quit bugging me.&quot; Sadly, too many borrowers don't know their rights with regard to disputed debts.</p> <p>The problem is, even bogus and disputed debts like these have some value on the secondary market. Debt collectors on the sleazier end of the business will buy debts for, let's say, 5 cents on the dollar. Then they badger the supposed borrowers, trying to get blood out of a stone. If the collection agency can collect 10 cents on the dollar, they're making real money.</p> <p>Once they've gotten what money they can, they'll sell everything on to some even sleazier agency.</p> <p>The danger I see is this &mdash; if the Rolling Jubilee will pay cash for these debts &mdash; especially if they're buying the cheapest ones they can find &mdash; they're rewarding the very people who keep selling on the illegitimate debts. That makes it worth keeping the fake debt &mdash; debt nobody actually owes &mdash; on the books.</p> <p>Anything that makes it more profitable to be sloppy about keeping track of who does and doesn't owe you money is a bad thing.</p> <h2>Still Probably a Positive Force</h2> <p>Despite the fact that the movement will do little good for real debtors, and will do some real harm (by inflating the value of fake debts), I think on balance the Rolling Jubilee is a good thing.</p> <p>I don't expect it will get big enough to be a real factor in the debt market, so the real harm is as limited as the real good it might do. But just by existing, it is advancing the discussion on <a href="http://www.wisebread.com/peak-debt">how our society handles debt</a>. That's a big win.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/downside-of-the-rolling-jubilee">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/beware-of-the-phrase-we-can-cut-your-debt-in-half">Beware of the Phrase &quot;We Can Cut Your Debt In Half!&quot;</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-deal-with-collection-agencies">How to Deal With Collection Agencies</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/surprising-things-that-can-kill-your-credit">Surprising Things That Can Kill Your Credit</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-erase-your-medical-debt">How to Erase Your Medical Debt</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/john-cummuta-transforming-your-debt-into-his-wealth">John Cummuta: Transforming Your Debt Into His Wealth</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Consumer Affairs Debt Management Financial News forgiven debt occupy wall street Wed, 28 Nov 2012 11:24:44 +0000 Philip Brewer 958810 at http://www.wisebread.com Forgiven Debt Isn't Really Forgiven At All http://www.wisebread.com/forgiven-debt-isnt-really-forgiven-at-all <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/forgiven-debt-isnt-really-forgiven-at-all" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/1176251_27831922.jpg" alt="Credit Card Debt" title="Getting Rid of Credit Card Debt" class="imagecache imagecache-250w" width="250" height="345" /></a> </div> </div> </div> <p>If you've been struggling with the rest of the economy, chances are you've been forced to rethink your financial priorities. And as a result, <a href="http://www.wisebread.com/credit-card-guide">credit cards</a> are often the first thing to go.</p> <p>The good news is that once you get behind, many credit card companies will offer to &quot;settle&quot; your account, some for as much as just 40% of your original balance. And if you're looking at a large chunk of credit card debt, making it go away for 40% of its value sounds like a pretty good deal.</p> <p>But before you write that check, there's a little detail you need to know: in many cases, credit card companies can report that unpaid amount to the IRS and &ndash; this is the kicker &ndash; <strong>you'll have to declare it as income</strong>.</p> <p>Wait a minute, you're saying. We made a deal. I settled that account and I even have a letter from my credit card company saying it was &quot;settled in full.&quot; I shouldn't have to pay anything else.</p> <p>And to that extent, you're right... you don't have to pay anything else... at least not to the credit card company.</p> <p>But using the same laws that allow the IRS to tax you on gifts and prizes, if the unpaid portion is more than $600, the IRS considers it to be income and that income is reported on a Cancellation of Debt Form 1099-C.</p> <p>That means that while your debt with the credit card company has been satisfied, you may stil have to pay Uncle Sam for getting such a great deal.</p> <p>For example, let's say you had a $2,000 debt that you settled for 40% or $800. Your unpaid balance &ndash; the amount the credit card company agreed to &quot;forgive&quot; &ndash; would then be $1200.</p> <p>At the end of the year (or whenever they do their reporting), the credit card company would report that amount to the IRS as a &quot;forgiven debt&quot; and send you a 1099-C to file with your individual tax return.</p> <p>Now, whether or not you'll actually pay taxes on that amount will of course, depend upon your individual situation and the amount of debt being forgiven.</p> <p>For most, a $600 increase in income isn't going to make a big difference in your taxable income but a bump of several thousand dollars just might. And if you consider that the average household has just under $10,000 in credit card debt and access to almost $20,000, it's not hard to see where a generous &quot;settlement&quot; offer might be considered during hard times.</p> <p>Fail to report this amount and you could set yourself up for an audit.</p> <p>This rule does not apply to certain types of debts such as those resulting from VA benefits, qualified farm debt, debts canceled in bankruptcy. It also is not applicable to debts that have been charged off so if your credit card company has sold the debt to a collector and written it off as a &quot;bad debt,&quot; they cannot report the debt as &quot;forgiven&quot; on a 1099-C.</p> <p>So, what can you do?</p> <p>While it's tempting to cut a deal with credit card companies, you may end up paying more than you bargained for. In addition, even though the credit card company notes that the account was &quot;settled in full,&quot; that is not the same thing as &quot;paid in full&quot; and the difference will be noted on your credit report.</p> <p>There are however, some alternatives. Most credit card companies would desperately prefer for you to get back on your feet and pay your bills so many are offering various payment programs to help you manage your debt while times are tough.</p> <p>Also remember that a credit card company will hold your account for at least six months before writing it off so if you're only a few months behind, you may still be able to avoid the collection agencies.</p> <p>Another option is to enlist the help of a consumer <a href="http://www.wisebread.com/credit-counseling-when-you-need-it-and-when-you-dont">credit counseling agency</a>. However, before you sign up, make sure the agency is reputable and be sure you understand how participating in the program will affect your credit.</p> <p>It might take a little extra work on your part to get out from under your debt, but at least you won't have to pay Uncle Sam any more at the end of the year.</p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/kate-luther">Kate Luther</a> of <a href="http://www.wisebread.com/forgiven-debt-isnt-really-forgiven-at-all">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-ways-debt-settlement-can-leave-you-deeper-in-debt-even-with-trustworthy-companies">6 Ways Debt Settlement Can Leave You Deeper in Debt (Even With Trustworthy Companies)</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-can-you-do-if-you-cannot-afford-to-pay-your-taxes">What can you do if you cannot afford to pay your taxes</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/solving-a-debt-dilemma-with-debt-settlement">Solving a Debt Dilemma with Debt Settlement</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-can-you-do-with-13-extra-a-week-0">What can you do with $13 extra a week?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-best-0-balance-transfer-credit-cards">The 5 Best 0% Balance Transfer Credit Cards</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Credit Cards Debt Management Taxes 1099-C debt cancellation debt settlement forgiven debt IRS Tue, 22 Sep 2009 13:00:09 +0000 Kate Luther 3630 at http://www.wisebread.com