trynrest

Can someone explain, Where is the money trail?

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It seems the more I research the more confused I get, so let me see if I have this right.

After a set time frame the OC charges off the debit. The OC gets to write off a loss with the IRS. Let's use $10,000 as the credit amount. Since I don't know I will guess the OC gets to write off $2000.

That leaves an $8000deficit. but hasn't the OC actually been reimbursed or credited $2000 by the IRS?

Still the OC sells the debt as $10,000 to a JDB. Again since I don't know I am going to say the JDB pays $1000 for the debit.

The JDB then files suit for $10,000 claiming ownership of the debit and stating the Defendant owes that amount.

But hasn't the OC actually been reimbursed or credited $2000 by the IRS?

One would think that the amount less IRS charges off should be $8000 and that the JDB should only be able to collect at most what they paid, if they can prove ownership?

So for the sake of arguement I am going to say the JDB gets a judgement for $10,000. If my thinking is correct parties that suffered a loss in a civil suit are entitled to restitution. The OC has sold their rights,

but what about the IRS? Shouldn't they be going after the JDB for the amount they allowed the OC to write off. If they are not my question would be why aren't they?

How would effect the JDB if they had to reimburse the IRS for all those Charge offs.

Just throwing this out their for discussion.

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If the original amount is 10,000 then the OC classifies 10,000 as a charge off.

Then they sell it to the JDB for probably around 250., give or take a few dollars.

So the OC can write off 10,000 - 250. which would be 9,750.

If the JDB does not collect on an account then the 250.00 plus expenses will be written off.

Say the JDB collects 5,000. on the account. Then they would owe taxes on 4,750. minus any other collection expenses.

A defendant who settles an account for 5,000 will get taxed on the remaining 5,000. for the forgiven debt.

A defendant who fights the JDB and wins will owe nothing in taxes since ownership was never proven.

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I'll give this a try, using the OP's number assumptions.

But first, let me tackle the issue of "the JDB should only be able to collect at most what they paid." This is not the case. If it were, they make no profit, and in theory they're entitled to it. To illustrate:

Let's say you and I play poker, and it comes to pass that I'm the winner and you're the loser, and you end up owing me $100, which you don't have. So you write me an IOU for $100. I bug you about it regularly, but for one reason or another you can't/won't pay. So one day I'm whining to a buddy named Bluto how I'm owed this money, and I'm having trouble collecting, and now I'm about to go to Hawaii, and I could really use the cash. So Bluto makes me an offer. He says, "I'll buy the IOU from you, so you have some cash to spend in Hawaii. But I want to make a profit for my trouble, so I won't pay the full amount. If this guy was a safe bet, I might be willing to pay you $90, and when I collect I'll make $10. But I might have rough this guy up, and then I'll have to buy some bandaids and mercurochrome for my skinned knuckles, plus suffer the associated pain, so I'll pay you $50. Making a $50 profit is worth the trouble to me." Now, can you see that arguing that Bluto is only entitled to the $50 he paid doesn't really make sense? Where's his profit for his efforts? With expenses, he'd actually lose on the deal. And you owe $100. Why should you get a break because I made a side deal with Bluto? Actually, the ability to buy and sell debt obligations for "what they are worth" when the associated risk is evaluated and factored in is kind of a cornerstone of our financial markets. That's what the bond market is all about.

Now, to your money trail question, using all your numbers. (You didn't mention interest, but it's kind of relevant.)

The OC loans $10,000 to the consumer. They are now out $10,000. They expect to get that $10K back, plus interest, which is their profit.

So now they don't get paid back, and at some point they give up hope of collecting. They're still out that $10K, plus they won't earn the interest on it they were expecting. But meanwhile, they did make, say, $1,000,000 in interest from their other customers. The will owe $200,000 in taxes on that profit. But they get to deduct that $10K from their profit, making their taxable income $990,000, and their tax bill $198,000. (And the IRS take is $2000 short what it would otherwise be.)

The OC sells the $10K debt to a JDB for $1,000. Now the OC's taxable income is $991,000, and the tax bill is $198,200. (And the IRS take is $1800 short).

If the JDB gets a judgment for $10,000, and collects, they now pay taxes on their profit, which is $10,000 - $1,000 - $9000. The taxes are $1800.

Scorecard:

OC total loss is $9000. The IRS is out $1800 as a result.

The JDB makes a profit of $9000. The IRS makes the $1800 up.

IRS take comes out to a wash, and they're happy.

Consumer has paid back the $10K they were originally borrowed, so they're back to even.

Let's go to ArtVandelay's scenario: consumer settles for $5000.

JDB profit is $4000. They pay the IRS their tax bill of $1000.

Scorecard:

OC total loss is $9000. The IRS is out $1800 as a result.

The JDB makes a profit of $4000. The IRS gets $800 on the deal.

IRS is still $1000 short of what they "deserve."

The consumer has only paid $5000 of their $10,000 debt. They have $5000 "in their pocket" that the IRS considers unearned income. The IRS wants their cut, and they want it from the consumer. When the IRS gets their $1000 for the consumer's $5000 unearned income, the IRS now has broken even; the entire $1800 they didn't get from the OC has now been made up by the JDB and the consumer.

I hope this didn't get too confusing.

Regards,

DH

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I'll give this a try, using the OP's number assumptions.

But first, let me tackle the issue of "the JDB should only be able to collect at most what they paid." This is not the case. If it were, they make no profit, and in theory they're entitled to it. To illustrate:

Let's say you and I play poker, and it comes to pass that I'm the winner and you're the loser, and you end up owing me $100, which you don't have. So you write me an IOU for $100. I bug you about it regularly, but for one reason or another you can't/won't pay. So one day I'm whining to a buddy named Bluto how I'm owed this money, and I'm having trouble collecting, and now I'm about to go to Hawaii, and I could really use the cash. So Bluto makes me an offer. He says, "I'll buy the IOU from you, so you have some cash to spend in Hawaii. But I want to make a profit for my trouble, so I won't pay the full amount. If this guy was a safe bet, I might be willing to pay you $90, and when I collect I'll make $10. But I might have rough this guy up, and then I'll have to buy some bandaids and mercurochrome for my skinned knuckles, plus suffer the associated pain, so I'll pay you $50. Making a $50 profit is worth the trouble to me." Now, can you see that arguing that Bluto is only entitled to the $50 he paid doesn't really make sense? Where's his profit for his efforts? With expenses, he'd actually lose on the deal. And you owe $100. Why should you get a break because I made a side deal with Bluto? Actually, the ability to buy and sell debt obligations for "what they are worth" when the associated risk is evaluated and factored in is kind of a cornerstone of our financial markets. That's what the bond market is all about.

Now, to your money trail question, using all your numbers. (You didn't mention interest, but it's kind of relevant.)

The OC loans $10,000 to the consumer. They are now out $10,000. They expect to get that $10K back, plus interest, which is their profit.

So now they don't get paid back, and at some point they give up hope of collecting. They're still out that $10K, plus they won't earn the interest on it they were expecting. But meanwhile, they did make, say, $1,000,000 in interest from their other customers. The will owe $200,000 in taxes on that profit. But they get to deduct that $10K from their profit, making their taxable income $990,000, and their tax bill $198,000. (And the IRS take is $2000 short what it would otherwise be.)

The OC sells the $10K debt to a JDB for $1,000. Now the OC's taxable income is $991,000, and the tax bill is $198,200. (And the IRS take is $1800 short).

If the JDB gets a judgment for $10,000, and collects, they now pay taxes on their profit, which is $10,000 - $1,000 - $9000. The taxes are $1800.

Scorecard:

OC total loss is $9000. The IRS is out $1800 as a result.

The JDB makes a profit of $9000. The IRS makes the $1800 up.

IRS take comes out to a wash, and they're happy.

Consumer has paid back the $10K they were originally borrowed, so they're back to even.

Let's go to ArtVandelay's scenario: consumer settles for $5000.

JDB profit is $4000. They pay the IRS their tax bill of $1000.

Scorecard:

OC total loss is $9000. The IRS is out $1800 as a result.

The JDB makes a profit of $4000. The IRS gets $800 on the deal.

IRS is still $1000 short of what they "deserve."

The consumer has only paid $5000 of their $10,000 debt. They have $5000 "in their pocket" that the IRS considers unearned income. The IRS wants their cut, and they want it from the consumer. When the IRS gets their $1000 for the consumer's $5000 unearned income, the IRS now has broken even; the entire $1800 they didn't get from the OC has now been made up by the JDB and the consumer.

I hope this didn't get too confusing.

Regards,

DH

The OC never lent any money to begin with in a CC transaction. The card issuer only acts as a servicer to the account ie a debt collector to the real party of interest. It is Visa or Mastercard who lent the money. They issue them through banks to have a financial intermediary who has capital to create a "Loan". But the banks have convinced congress and the courts that they lent money and the debtors who do not pay thir debts are deadbeats.

IF you ever try to trace a money trial with CC debt..there is never any money that you will find coming out of the pocket of the issuing bank.

Once their is a balance on a CC account, the balance is sold to a third party, but no money exchanges hands!!

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