Encore Capital Group, Inc. (NASDAQ:ECPG) announced yesterday that it has collaborated with U.S. Reps. Scott Peters (CA-52) and Duncan Hunter (CA-50) to create a bill that would exempt up to $2,500 worth of forgiven personal and household debt from federal taxation. The bill (H.R. 2640) was recently introduced as the “Consumer Debt Forgiveness Tax Relief Act of 2015.”

Under the current system, a consumer who is forgiven personal or household debt is still burdened with a tax on the value of that forgiven debt. Although it’s less than what they would have had to pay to satisfy the debt, this leaves many consumers who thought they had negotiated a lesser amount due – or even no amount due – with a bigger obligation than they realized. And now they owe the IRS, not just the collection agency.

“Through our work with millions of consumers, we’ve seen firsthand that the current system creates a frustrating ‘one step forward, two steps back’ situation that penalizes people who are doing the right thing by repaying their debt,” said Sheryl Wright, Encore Capital Group’s Senior Vice President of Corporate & Government Affairs. “This legislation seeks to empower consumers at a critical juncture on their path to financial recovery and stability.”

According to the Encore press release, Encore has forgiven more than $355 million of debt to approximately 445,000 consumers in 2014 alone.

insideARM Perspective

What has also been at the center of this issue is whether or not collectors are responsible – or required – to make what’s known as a “1099-C disclosure.”  A 1099-C is the tax document a “forgiving” entity is required to produce for the person who has received the benefit of a forgiven debt. It’s considered income, just like a W-2 reports wages. Few consumers are aware of this.

The challenge is that you don’t want rank and file collectors giving tax advice – which is likely where the discussion would lead. They are not trained accountants and are not qualified. So that could open a can of worms. It’s similar to having collectors talk about credit bureau reporting, suggesting the benefits that paying – or not paying – may or may not have on their credit reports. Another can of worms. It’s also quite tricky to handle the 1099-C issue when the consumer claims that they did not owe the debt. This Bank of America case from 2014 is a good example.

If the proposed legislation were to pass, not only would it be a benefit to consumers whose debt has been forgiven, but it would also relieve collection agencies from having to print and mail 1099-c notices, which would reduce the cost of collecting… and forgiving.

According to the Encore press release, typically, when Encore works with consumers who owe a debt to create a workable repayment plan, the company offers a significant discount, referred to as debt forgiveness. In 2014 alone, Encore is proud to have forgiven more than $355 million of debt to approximately 445,000 consumers.

Continuing the Discussion

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  • avatar Dr Tax says:

    It’s a W2 that employers use to report wages to the IRS on, not a W4. A W4 is used to determine the correct amount of withholding by the employer’s payroll department.

  • avatar Stephanie Eidelman says:

    Dr Tax, of course you are correct; this was my careless mistake. Fixed. Thanks for catching it.

  • avatar Derrick Smith says:

    I consider this a great first step but it doesn’t go far enough. If passed, the savings to the consumer is up to about $500 – $800 per forgiven debt based on the individuals tax rate, far less than the thousands owed in taxes on larger forgiven balances. To help a larger segment of the population I say be bold and increase the amount of forgiven debt for this bill to $10,000. It’s not as if consumers use pre taxed income to pay debts anyway!

  • avatar Newb Collector says:

    While I see how this can be a great incentive to get people to pay their bills and create less confustion (in thoery,) my biggest issues with this is that the country is going to further reduce the income being taken in by the government while the expenses continue to sky rocket. This is going to further cause the country to further spiral the country in to debt which we can’t pay as it is. Basically this is going to solve personal debt on the back of national debt.

    “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy. “

  • avatar bill-jones says:

    Newb – Are you kidding? “Solving personal debt on the back of a national debt”? Collector logic at its finest. The lost revenue would most likely be 0.00000000001% that this country gave to lenders in bailouts rewarding their reckless behavior. God forbid the consumer gets a break as the d-bags in the financial industry line their pockets with taxpayer money.

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