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.
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.