Readers of our Louisville Bankruptcy Law Blog have probably heard about a movement called “Occupy Wall Street” and the offshoot “Strike Debt.” They may have even heard about the millions in debt that the group has wiped out over its existence. Most recently, the group eliminated approximately $13.5 million in debt in a single sweep. How did they do this?
When we take out a mortgage, a car loan or charge money on our credit cards, we have created a debt. The lender makes money by charging interest on the debt. In some cases of default, a lender feels that collection efforts aren’t worth it and may sell the loan on the secondary market. It is here where the group steps in.
Debt that is sold on the secondary market can be purchased by investors for much less than the borrower would have to spend if all principal and interest were to be paid off. Strike Debt purchases the debt in anonymous bundles, but instead of collecting on it, they simply forgive it.
While this sounds like a great plan, there are some problems for the borrowers that are “helped.” The first issue is that while millions of dollars of debt have been eliminated, the chances for a single borrower to have their debt picked up are very slim. Second to that, it is unclear what the tax implications for the borrowers will be.
Debt that is forgiven can either be considered income or a gift. There are possible tax consequences for both of these, but we’ll use income as an example. If the IRS deems the forgiven amount of debt as income, a taxpayer would have to pay tax on that amount in a single year, which often even pushes them into a higher tax bracket. For many, this is something that they cannot do. Failure to pay this tax or declare it on an income tax return could lead to severe penalties and high interest.
There is still approximately $13 trillion in debt that is held by individuals in around 77 percent of households across the nation, according to the Smart Planet report. Instead of waiting to win the debt lottery or risking serious tax consequences, individuals in Louisville may want to consider exploring their debt relief options with a bankruptcy attorney who is under a duty to act in the benefit of the borrower.
Source: Smart Planet, “How Occupy Wall Street Cleared $15 Million in Debt with Just $400,000,” Tyler Falk, Nov. 12, 2013