This may be off topic...just curious if anyone knows

[cookie123]

Does anyone know how these Junk Debt Buyers report thier profits to IRS for the "unjust enrichment" they collect from default judments, settlements of debts, court orders, etc. ?

They cannot possibly be treating it as if they were a financial institution that contracts loans and credit accounts like the Original Creditor does. As if the company has some type of investment in the account. They buy the Debt that is uncollectable by the original creditor for pennies on the dollar. Try to enforce the original contract for balances due. Is this all profit for them?

I am just thinking to way much I think. I just cannot see how they account for this type of behavior with IRS.

I know this is way off topic. But I cannot understand how this could be legal. Inflating the cost of something for profit. That would be like me buying a fake diamond ring for 200.00 then selling it as if it was real for 3000.00. Unbelievable!!!!

[Guest usctrojanalum]

It is not against the law to assign another party your rights under a contract though.

[jq26]

It is simple. A JDB buys a pool of virtually worthless defaulted loans for $0.01 per $1.00 of assigned value. So a hypothetical loan pool might have a face value of $1,000,000 but the cost basis of the asset is $10,000.

They then attempt to extract as much cash from the loans. Through debt collection, lawsuit, whatever. The salaries of the employees and costs are expenses. Assume for this loan pool the costs of collection, legal expenses, utilities, etc. is $25,000.

Assume now that only 10% of the loans generated any revenue. Half (5%) of them received full payment ($50,000) and 5% of them received 50% payment ($25,000). You have total revenue of $75,000.

For simplicity's sake, let's assume the life of the loan pool asset is one year or less. That way we don't have to amortize the cost of the asset over multiple years.

So all told, the calculation is as follows:

Revenue ($75,000) - Cost Basis of Performing Assets ($2,000) - Cost Basis of Non-Performing Assets ie "Write off" ($8,000) - Operating Expenses ($25,000) = Gross Profit of $40,000. That is then taxed to death of course, so net profit may be $25,000.

The IRS does not allow the JDB to use the face value of the claims ($1,000,000) for write off purposes while only paying the fair market value ($10,000). That's called tax fraud. Obviously this is a non-starter- cost basis is what you paid for it regardless of what it is worth. But assume for a second, they DID allow JDBs to generate whopping losses by using face value instead of cost basis. The only thing this would be good for is negating income and creating NOLs (net operating losses) to carryforward for a maximum of five years. Without income to offset, NOLs expire and are entirely worthless. In other words, they aren't refundable so you can generate a billion dollars of losses every year and you don't get any benefit.

Not entirely related, but a very similar type of inflated cost basis scheme to generate losses has been shut down since the early 1980s when the nonrecourse real estate partnerships were a popular tax shelter scheme. For anyone who cares, partnerships are a unique entity in the tax world because nonrecourse debt taken on by a real estate partnership is added to basis even though virtually none of the partner's capital is at risk. Congress closed this loophole by creating the "at-risk rules" (while at the same time killing middle class investors with harsh passive activity loss limitations). But again, the loss generator scheme was worthless unless you had to have a whopping income to offset. So a lot of doctors and professional athletes got sucked into these tax shelters. Then when the IRS shut 'em all down in 1984, all involved lost a lot of real money.

Edited September 2, 2010 by jq26

[cookie123]

Wow! Thanks, I just get so upset hearing and reading some of these posts that it makes me think. How can this possibly be legal?!?!

Thanks for the input jq26. Very insightful

[jq26]

Think about it like you had 10 friends that loaned money to strangers that didn't pay them. Your friends are busy people and they have no idea how to collect from someone. They are engineers, doctors, landscapers, etc. and their productive time is better spent performing their craft. So you, Mrs. CreditInfoCenterReader know a thing or two about collection so you tell them each "This claim is worth more to me than it is to you because (1) I know how to collect and you don't and (2) your time is better spent performing your craft, whereas my craft IS collection. So I'll guarantee you a payment of $1 today for you to assign me the $100 claim. Maybe I'll collect on it, maybe I'll won't. I'll assume the risk."

They all assign you their claims. You are now a JDB with a potential payout of $1000, with a cost basis of $10. If you don't collect at all, you write off the entire $10 as a bad asset. If you do collect, then you have derived a net benefit by assuming the risk of loss.

Just like mortgage backed securities that sell for 20 cents on the dollar in the open market, there is no unjust enrichment involved. The face value of the claims don't and shouldn't get discounted. So long as they are valid claims, this is the market doing what it should. The prices of these things should change daily based on recovery rates, macroeconomic conditions, interest rates, change in laws, underlying values of any security interests, etc. But the face value never changes.

Most JDBs cut corners and just hope you'll fold before they sue or not show up to court if they end up suing. But if you put up a fight, they'll likely run. There are endless claims purchased and time is money. So if they have to enagge in discovery to get $3000 out of you, they may be able to get that out of 15 customers with the time that they would spend pursuing you.