Steve Rhode, a consumer debt expert, writes about the possible unintended consequences of Occupy’s debt scheme.
I suppose they’ll be issuing 1099s, as required by the IRS, so those consumers that have their debt forgiven and who are not insolvent will wind up owing taxes on the forgiven debt. Otherwise, I sure hope the Occupy Wall Street folks have a letter in hand from the IRS that definitively says they are exempt from having to file a 1099 on the forgiven debt.
In my opinion the effort is misguided because this strategy can result in those with their debt forgiven, owing the IRS. Otherwise, I’d love to see they have vetted the idea fully before proceeding. If they purchase larges chunks of debt and then have to backtrack later and issue 1099-Cs, it could impact a lot of people.
Consumers that would not be subject to taxes due from debt forgiveness would be insolvent already. Those consumers would most likely benefit from a consumer bankruptcy that discharged all of their debt quickly. Those that would owe taxes on the forgiven debt are most likely going to be solvent, meaning their assets exceed their liabilities, and will not be able to waive the tax due.
According to tax expert and CPA Jim Buttonow, a former IRS examiner, “This is a very complicated area of taxation. The amount that a taxpayer includes in income depends on the facts and circumstances in each case. The fact that a lender does not issue a Form 1099C does not determine whether or not the transaction is taxable. It is the facts and circumstances in each case.
Also remember, student debt cannot be discharged by bankruptcy. This drives the price up when buying defaulted student loans as they are more likely to be repaid. Occupy will have much less impact on student loans using this scheme.