Thoughts on collections after taking a tax write off

[admin]

This has been bothering me for awhile -

Why can a credit card company charge off a debt, take the tax write off and then sell/or assign the debt to a collection agency? Questions:

1. Isn't the fact that a collection agency collects on a debt double collection? I mean, the credit card company got some monetary value out of the debt.

2. I'm sure this is legal via laws, but is it legal via the IRS?

[willingtocope]

I'm sure this is all tied up in the CCs accounting systems. I too would like a better understanding, but my first guess would be...

1. They claim a loss for the entire debt...late fees, and all...which would decrease income.

2. They claim any money they get for selling the debt to the CA as "income". There's probably a whole "sell debts to CA's dept" that's a profit center for the company.

All nice and neat on the balance sheet and the IRS forms.

The thing I'm most confused about is what, if anything, do you legally owe the CA? In effect, whatever you pay them goes to reimbursing them for what they paid the OC, then whatever "costs" they incurred in collecting...the rest is all profit. I don't see how they could be entitled to make 70-80% profit legally...

[admin]

Yes, this seems quite fishy to me...

[itsgettingbetter]

I am NOT a tax expert--but a family member is--he has an LLM in tax law over and above his law degree.

Here are a few scenarios--

1) creditor loans you $1000 dollars--and you pay them back $1000 dollars--everyone is happy.

2) creditor loans you $1000 and you do not pay at all. They have to make the decision to A) sue you and get a judgment for a thousand dollars (which they will get by either garnishment of your wages or a lien on your property or if you have no assets--they will "write off" the debt and sell it to a CA. There is a misconception here--when they "write off" the debt they TAKE A LOSS on the amount that is written off. It is completely wrong to think that they get the ENTIRE one thousand or even anything close to that amount. When the debt is written off--they TAKE A LOSS on the amount that is written off. So they are always unhappy to do this--and they would always rather get paid as much as possible on the debt. They do NOT want to write it off--and they don't want to sell it to a CA--what they really want is to be paid the full amount.

3) If you owe 1000 to the creditor and you settle with them for $400--they can either legally write off the 600 that was forgiven OR they can sell the debt owed to a CA. (THEY CANNOT DO BOTH). Some people here prefer that this amount be sold to a CA--others (like myself) prefer that this debt be forgiven even though then, the debtor has to file some paperwork regarding the situation to the IRS.

****The amount that they get when an account is "sold" to a creditor is income (just a settlement amount paid by the debtor is) and this amount is NOT written off. They can ONLY write off the amount that they are NOT compensated for. I assure you--my brother has worked for many major corporations--this IS the law.

If the debt is "forgiven" and "written off" so that you get a 1099 for the full amount--that does NOT mean that the creditor will get their $600 from the IRS!!!! When they "write that amount off" it will probably end of being worth a deduction of approximately 150-200 dollars on their tax burden. So--they are taking a LOSS. But--because they are not going to have to go to anymore trouble trying to collect--they are willing to do this. They have the option

For some weird reason--there are people who are under the impression that a creditor can--1) take your $400 in settlement, 2) then get reembursed by the IRS for the FULL $600 that they did not get (they wish!!! a creditor is extremely lucky to get one third of what is written off--and he will only get it as a write-off) and then 3) also sell the $600 to a collection agency. In other words--in this twisted and improbable scenario the creditor would actually come out far ahead when people do not pay their debts--in reality--the creditor takes a loss when debtors do not repay their debts.

I don't know how people got this in their heads--but if a creditor actually did this would be illegal. Perhaps some creditors might try this--but there is no way that the big guys do this--like Chase, AMEX, Citibank--they have a whole flock of lawyers. Generally, if a debt is uncollectable (or a portion of that debt is uncollectable) then these creditors want to issue a 1099, and have the debt legally discharged.

[admin]

I hear what you're saying, and I agree.

But usually when a debt get turned over the collection agency, two things happen that seem pretty odd:

1. The colleciton agency tries to collect the whole amount. Why is this legal if the credit card company gets 30% of the charge off back? Is is a net to them, they are getting the money back.

2. In order to get even a fraction back, doens't the whole amount of the loan need to be lost? What if a portion of that is recovered - don't they need to adjust the loss?

This is what I'm having a hard time understanding.

[DocDon]

This is what Chancy is taking issue with too... it is screwy.

I read that companies pre-calculate losses into their projections - it's expected. Because of this, there isn't a "direct" gain by the CC company from the IRS - it's all lumped together in their project losses.

[itsgettingbetter]

1. The colleciton agency tries to collect the whole amount. Why is this legal if the credit card company gets 30% of the charge off back? Is is a net to them, they are getting the money back.

Response: In MOST cases you do not LEGALLY owe the CA a penny!!! If the entire debt has been legally discharged as a loss. A CA can TRY to collect--but legally you do NOT owe them.

(but not always--there are some exceptions--one notable exception is that medical bills commonly go to CA's very quickly--and they usually have NOT been written off first) .

This is something that most people do not know. That is why the validation letter that we use works so often--in many cases the debtor does NOT really legally owe the CA the amount that they are being billed for--the only reason that CA's are so successful in collecting is because many people do not know their rights.

If the ENTIRE amount has indeed been written off as a loss---then the CA cannot legally collect that entire amount. Of course they will try anyway--but thanks to resources like this--people are starting to know their rights! (I really appreciate this site!!!--and thank you to all wo provide it for people).

2. In order to get even a fraction back, doens't the whole amount of the loan need to be lost? What if a portion of that is recovered - don't they need to adjust the loss?

Response: it is just a question of book-keeping. In the example where I paid a settlement amount of $400 on a 1000$ debt--only 600 $ is lost. When the OC writes off $600 on their taxes--it is NOT the same as getting $600 in their pocket--it just reduces the amount of taxes due--probably by a couple of hundred dollars. So--they get something back--but they do NOT get the entire amount--they DO lose a little bit. If they sell to a CA instead--they still lose--the debt will be sold for a fraction of what it is worth--and they CANNOT write off the amount that they were paid--because that amount was NOT actually "lost". They can only write off the amount that they have NOT been compensated for--either by the debtor or the CA.

It is not easy--(that is why people with complicated tax situations usually consult a professional to make sure they get everything right). I am actually not an expert--I am just glad that I know one.

[Chancy949]

I'm so glad someone else is thinking about this. Admin... there is something here, I can just FEEL it. I really feel there is new case law about to be written! I think we should ask an IRS agent or someone like that. I think we are all being scammed on this deal. Yes its being written as a LOSS. Actually I will disagree with Itsgettingbetter. I think businesses DO want the LOSS write off. I've worked with Small Businesses for a number of years.

I think there is a formula for the amount they charge over the limit + late fees X time (6 months) = the amount that they will not be able to write off, (does that make sense?) Lets say they can only write off 30%. Well after you run up the 6 months worth of fees, which are not "real" debt. (meaning money they actually loaned you) minus that, you get the amount or close to it, that they actually loaned you. Still with me?

I would like an IRS agent to explain to me why this is legal, to collect the full amount on a debt that has been charged off.

[Chancy949]

Oh and I think that owing the IRS LESS IS getting money back in my pocket ! JMHO

I also think that they work on a scale, if they get enough bad debt as a write off and it lowers their taxes, then if it is a certain amount, it could drop their tax liability into a new "tax bracket?" That difference could be substantial from what they would have owed if all of the debt was paid, verse if a percent of the debt can be written off, and lowers their tax liablity. did I loose anyone? its hard to explain in this format.

[itsgettingbetter]

if we are talking about a small business you are correct. But I was NOT talking about a small business, but only about a large CC company.

you must be aware that the tax liabilities, exemptions, and write-offs of a small business will not in ANY way be equivalent to the situation at the large CC companies (and that is who many people here are dealing with) which is who I was referring to.

For the large lenders--such as Citibank, BofA, Chase, AMEX--most of their income comes from their large corporate accounts. These accounts bring in business in the TRILLIONS of dollars every year. Individual accounts, such as our credit cards--are not their main source of income and writing off a 10K debt for a debtor does not make much difference to their bottom line. This is true even if they will probably do this for several thousand debtors in any particular year. (yes--to a small business--this WOULD be a significant amount--and a small business probably could write the entire thing off--but every situation is different--I only asked the tax attorney about the large banks.).

There are many individual circumstances that affect taxes--I ONLY got advice from the tax attorney about the case of major cc companies. The information that I passed on cannot be extrapolated to be applicable to ALL situations--(from one man businesses to mega-conglomerates) it is only applicable to the situation that I got the information for--that of a major bank writing off a debt.

I don't personally know the "bottom line" for these companies, but my information comes from an attorney with a law degree AND an LLM in tax law--he has actually worked for several large banks (including one of the ones listed above). He charges approximately $400 per hour for his advice on tax laws. So I feel pretty confident about what I passed on--the caveat is that of course it is only applicable to the big banks that I referred to--NOT to every situation in the universe.

I am not sure what you mean about new case law being needed? There are LIBRARIES filled with case law on this subject. IMO, what we need is to make it simpler--so that people can understand it. People who run a small business would be hopelessly naive if they think that their situation is exactly equivalent to the situation of a multimillion dollar corporations.

It confuses me that this was said "I would like an IRS agent to explain to me why this is legal, to collect the full amount on a debt that has been charged off." As explained before--it is NOT legal for a CA to try to collect the full amount if the debt has been charged off. This is just something that CA's try to do. The IRS has nothing to do with this that I know of. I have never heard of the IRS having any control over the CA's?

[admin]

you must be aware that the tax liabilities, exemptions, and write-offs of a small business will not in ANY way be equivalent to the situation at the large CC companies (and that is who many people here are dealing with) which is who I was referring to.

I don't think this is true - small C corps operate under the same tax laws as large C Corps and the tax codes are not much different for S Corps or LLCs as for C Corps. I'm not sure how they would be so different. I've prepared taxes for both.

[itsgettingbetter]

ummm

NO I never meant to imply that LAWS are different (for small and large businesses). What I was trying to say that how a particular write-off impacts their comparative tax situations will be quite different.

This was in response to the poster that was talking about small business and how easy it would be for a few write-offs to move a small business into a different tax bracket. Well--with a large corporation like citibank--all the writeoffs that they do in a year will not significantly impact their tax bracket. That came straight from someone who has DONE the tax preparation for Citibank.

Anyway--apparently a lot of people are very confused about this--I can tell this by reading everything posted on this subject.

I was very confused myself, but now it is pretty clear in my mind --only because I got several hours of one on one tutorial from a $375 per hour tax attorney. I would like to be able to help others--but really it is not my area of expertise and I can't think how to explain any more clearly than what I already have done.

So I am going to leave this issue alone now, as I don't think I am making it clearer--perhaps only confusing people more.

[admin]

Well, we all need an education, obviously, me mostly. Thanks for hanging in there.

[DocDon]

If the tax code wasn't so confusing, I might try reading it myself....

[itsgettingbetter]

sorry I wish I could do a better job--it isn't really my area--and I probably just muddle everything up more for everyone.

It was perfectly clear to me at least when it was beign explained to me!!!

But--I am going to stop--because I think I am confusing people more.

The important thing to know is that -- the CA's do NOT always have the right to collect the amount that they are trying to get--that is why insisting on debt validation (which is already the recommended policy here) is such a great idea. (we already know it is a great idea--this just provides some supporting rationale for why it works sometimes.)

CA's are empowered to get whatever they can--but you may NOT really legally owe them the amount they are trying to collect. We already know this--and have a policy of demanding validation--but this is one of the reasons WHY validation is such a good idea. In some cases, the debtor does not LEGALLY owe a cent!

[Chancy949]

I'm sorry if you took offense to my statement. I wasn't trying to say that someone who makes 375.00 an hour doesn't know what he's talking about. I was giving you from my perspective and I only make 45.00 an hour.

What I meant by new CASE LAW being written is this, if there has been a case argued in front of a judge that this debt has been charged off, so I don't owe it, I'D LIKE TO SEE IT! I asked this in another post.

What about the rest of my post for artificially jacking up the amount owed in "FEES", yes we agree to the fees. but I think there is method to their madness. Its not "real" debt. The money was never loaned.

[c m chase]

I just stumbled on this. WOW.

I may be confused as all hell, but I'm a lot more clear on what EVERYONE needs to know when dealing with CAs, in that it's not necessarily legal!

This:

1. The colleciton agency tries to collect the whole amount. Why is this legal if the credit card company gets 30% of the charge off back? Is is a net to them, they are getting the money back.

Response: In MOST cases you do not LEGALLY owe the CA a penny!!! If the entire debt has been legally discharged as a loss. A CA can TRY to collect--but legally you do NOT owe them.

(but not always--there are some exceptions--one notable exception is that medical bills commonly go to CA's very quickly--and they usually have NOT been written off first) .

This is something that most people do not know. That is why the validation letter that we use works so often--in many cases the debtor does NOT really legally owe the CA the amount that they are being billed for--the only reason that CA's are so successful in collecting is because many people do not know their rights.

If the ENTIRE amount has indeed been written off as a loss---then the CA cannot legally collect that entire amount. Of course they will try anyway--but thanks to resources like this--people are starting to know their rights! (I really appreciate this site!!!--and thank you to all wo provide it for people).

...should be a sticky itself!!

I've thought about that, but never really THOUGHT about that. Chancy had asked me that awhile back and all I could do was shrug my shoulders. This gives a whole other depth to the DV and what you can and should ask for.

itsgettingbetter....do NOT give up on us. People who stick around and try to explain things, even when we whine about not getting it, are the reason we all know what we know.

[Chancy949]

OK!

Lets look at it this way. If the debt is charged off isn't it breaking the FDCPA or the FCRA for misrepresenting the debt? The debt is technically gone, better yet, they got the FEDERAL GOVERNMENT to say the debt is gone, so to try and collect on that debt, is fraud, misrepresenting the debt.

Anyone? Anyone?

and yes we are a bunch of whiners! he he!

8)

[willingtocope]

itsgettingbetter: Yes, please don't give up on us. You've provided some valuable insite there. My only comment in return is that I'd like to have a CPA's opinion on the same subject. Usually, the books are already cooked before it gets to the tax lawyer.

[luckyduck]

OK. Let's say company has 2 debts that it charges off. Only 2 for simplicity.

Year one:

Joe owes $500.

Jane owes $500.

Jane and Joe won't pay.

Company charges off $1000 that year, and reports it as a loss to IRS.

Year 2:

Billy owes $500

Barb owes $500

Billy and Barb aren't paying their bills, and company charges off $1000

Well, Joe comes back and pays his $500.

Company deducts the $500 payment from the $1000 that accrued only reports $500 in charge offs.

Year 3:

No charge offs. Every current customer is paying bills on time.

Billy, Barb, and Jane all pay their debts for a total of $1500.

Company reports -$1500 in their charge off ledger account. Then reports this to IRS, and pays taxes on it. Basically, all it does is defer taxes for the income that is charged off, then later received.

Charge offs are a separate ledger account from income/expenses/etc... They get reported as they are increased or decreased. They are used only for tax purposes. A charge off does not represent a legal end to the debt, only a number showing what they think will never be recoverable. If it is recovered, they have to figure that in too.

It is a tax figure only, and has nothing to do with the debt itself. So, legally you are responsible for a charged off debt. They are not collecting twice. They save taxes when they write it off, then pay taxes when they receive payment. It all balances itself out taxwise.

If, on the other hand, they forgive the debt, and report it to IRS as debt forgiveness, you are not responsible. That is a different type of account, with a different tax ramification. It's a gift and can't be "taken back".

If they sell the debt to a CA, they report the loss (difference between debt and sale price), and save taxes on that loss. This is where I may be lost. It would seem that the portion which was completely written off in this case would be forgiveness, and you should get a 1099 for this. The OC will never receive it, so it is not just a simple charge off, because it cannot be reversed as a charge off can. It then seems that you would only be legally responsible to the CA for the amount that they paid for it.

Maybe this should be added to DV letters for debt buyers. How much did you pay for this account? I don't owe you any more than you paid for it. The rest was forgiven by the original creditor. Of course, usually in that case, it's past SOL and you don't owe anything anyway. But if it isn't past SOL, you should only pay what was paid.

[Chancy949]

I think between Lucky and itsgettingbetter, we have an answer. My question always came up where Lucky got stuck too. What happens when they sell the debt that is charged off? They can no longer reverse it on their books and I have no agreement with this CA, so where does this leave us???? Why would I pay say 500 bucks on the debt that the person collecting on only paid 20 bucks for? The CA bought a BAD DEBT. What do they expect? Logically, who in their right mind would buy a BAD DEBT?? I think its just bad business. I can see having the punishment on my credit for the charge off, but I don't think they should be allowed to collect on it and report it if they bought it knowing it was a bad debt. What is the law that says its legal to purchase a bad debt (charged off debt) and collect on it? The whole catch here is the charged off status and then selling it. I am not questioning the right to collect on a debt, even hiring a collector. But writing it off AND selling it....I say if it can't be reversed on the books like Lucky said, its dead... a dead debt.

Maybe we should try and get a FTC Staff opinion letter on this topic!

[itsgettingbetter]

Thanks every one---I was not offended or upset with anyone--I just felt I was not doing justice to explaining this properly--and probably confusing people more.

(I am not the greatest communicator in the first place--and the electronic medium is not my best anyway). That was why I thought I would step out of this one--I felt like I was making it even more confusing.

Anyway--all this is such an education. I settled two quite large accounts this year--and I really educated myself before I settled them--because I wanted to make sure that I did the right thing.

I am not very confident on the subject, but I am extremely fortunate--I have a huge family (my mother had 9 siblings! and so did her mother!) and so I have family members in almost every area of business--this has been a great benefit to me.

I didn't explain as well as the expert--but hopefully there was something helpful in there.

[itsgettingbetter]

willingtocope, you have it right there!

tax attorneys are responsible for manipulating the money so the tax burden is as small as possible (usually big corporations and very wealthy people use tax attorneys for their tax planning so that they pay as little as possible in taxes).

This tax attorney currently has about 200 CPA's working for him--they do the actual work of tax preparation--he oversees the whole show--and meets with people to plan how to shelter their money.

Tax attorneys don't actually prepare taxes. But they "know the game" and they "know the law". They are the experts in what a company (or an individual) can get away with.

I will probably learn more the first week of Feb--he is going to look over my taxes etc (I am claiming insolvency) so I will probably pick up some more information then. So--if anyone has more questions on this--I can try to get more answers then.

[luckyduck]

Personally, I say once it's out of SOL it's dead, and you should never hear word of any SOL debt in any manner, letter, phone, CR, anything. The law gives them time, and if they go past that time, they forfeit all rights, including the right to attempt to collect the debt. If you had a doctor on malpractice, and didn't file in time, do you think you'd be able to keep sending dunning letters to the doctor requestng payment. I think not.

I only think the portion that was permanently written off should be considered dead. I think the amount that was paid for the debt, which wasn't written off, should be paid (unless it's out of SOL) if there is proof enough to validate. But all of this is opinion.

Buying bad debts works because the one out of ten that pay make up and exceed the amount they can't collect on the other nine. Remember they are paying pennies on the dollar, charging you the entire amount plus their own charges. So, just a a small percentage of successful collections can make it profitable for them.

The concept which should be well known by now, is that if you don't agree, and the law doesn't permit, then the OC cannot sell/assign the debt. Our state laws (IN) specifically say that a collector has the right to act as the OC in regards to a debt, including filing lawsuit in their own name. Not every state has that law though. Lacking a law allowing assignment and lacking a contract permitting assignment, they cannot assign the debts. If you got an auto loan, you couldn't just transfer your obligation to someone else without permission from the OC could you?? If so, there might not be as many debtors unable to pay their bills.

Let's look at a sold contract and what YOU owe. You signed a contract saying you would pay XXX amount of dollars. You are still bound by that. The debt is still worth what you agreed to pay. So, buying a bad debt is nothing but a profit making mechanism. The debt is still worth XXX dollars because that is what you agreed to pay. But OC is selling the XXX dollar contract to CA for YYY dollars because OC has more important things to do than enforce its contract (which I think they should be required to do).

The contract and your obligation never changed. The only thing that changed is the second party to the contract (which is only legal if certain requirements are met). So, second party says yes, I'll let you do more important things, and I'll enforce this contract. Let me give you YYY dollars, and now it's my contract. Debtor still owes XXX dollars, but now debtor owes it to me.

XXX dollars never changes and neither do you. Now, if you want to assign your obligation to someone else, and they want to agree, you could. Problem is even the stupidest people aren't THAT stupid.

So, it appears to me that debt buying is lawful in some cases. If you pay no more than the original contract, you really don't lose or gain anything. Remember you did create the debt. The OC loses because you didn't pay them. The CA gains because they are nothing but profiteers.

[luckyduck]

Oh, and to add to it in the matter of IRS speaking. If the OC writes off the portion of the debt they didn't sell, they get tax relief, and the IRS loses tax money.

When the CA collects the portion they didn't write off, the CA pays income tax (and IRS collects money). So, in essence, yes, it is reversible, only it's being reversed by a different entity.

The IRS actually wins when a CA collects on a debt, especially when they are collecting more than what was originally owed. So, no there is no double tax relief on any end. The IRS wants somebody to get the money. They don't care who.