Want to Buy & Forgive Debt Like John Oliver? Not So Fast

When John Oliver announced Sunday night that he’d purchased medical debts as a faux collector and forgiven those debts, the Last Week Tonight host’s actions led to a serious question: Couldn’t this strategy be used on a wide scale? After all, Oliver managed to forgive about $15 million in debt for only $60,000.

It’s a clever idea that has its roots in the Occupy Wall Street movement. Back in 2012, a group calling itself Rolling Jubilee began doing precisely the same thing. It raised money to purchase debts, then told the debtors their bills were forgiven.

While Rolling Jubilee initially focused on medical debt, as Oliver did, the organization now focuses on student loan debt. It claims to have abolished nearly $32 million in debt and raised $700,000.

Oliver actually executed the debt forgiveness by transferring the “paper” to a non-profit named RIPMedicalDebt.org, which was set up to mimic Rolling Jubilee’s strategy, according to the site.

But debt forgiveness using this strategy raises many questions. Chief among them: As Oliver said, his $15 million “giveaway” was really just a drop in the bucket. The Consumer Financial Protection Bureau says that 43 million Americans have an unpaid medical bill on their credit reports. That means Last Week Tonight would have to do roughly 4,777 more episodes to help all those folks.

The Impact on Credit Scores

Debt-buying-and-forgiveness highlights some other interesting issues. As many Credit.com readers know, the real pain from an unpaid bill isn’t necessarily harassment by a debt collector. It’s often the credit score punishment that follows, which can force a consumer out of typical market transactions. Low credit scores can prevent a consumer from buying a home, a car, or even from getting a credit card.

It’s impossible to say what impact this kind of debt forgiveness would have on an individual consumer’s score — scores are calculated using multiple personal factors. But generally we know that when a debt is marked as settled, or anything other than paid in full, that’s very bad for a score. The negative impact shrinks over time, but it can last seven years. According to this chart from FICO, a settled debt can cause up to a 100-point credit score drop.

We know that the debt Oliver purchased was described on the show as “out-of-state medical debt from Texas,” meaning it was older than that state’s statute of limitations for collection — which in Texas is four years. In that case, the impact from the four-year-old-plus debts may be low, but in many cases, it will still hurt those consumers, even after their debt was “forgiven.”

There’s another silver lining about the debt Oliver purchased: Newer formulas used for credit scores, including FICO 9 and VantageScore 3.0, treat medical debts differently, so that should help some of these consumers, too. Those formulas are slowly making their way through the credit industry.

“Assuming that Mr. Oliver’s debt purchasing company reported these debts as consumer accounts to the credit bureaus, and then updated the accounts to reflect that the debts were ‘satisfied’ (for example, that the outstanding balance was zero), then there could potentially be a positive impact on the FICO Score 9 score,” Ethan Dornhelm, principal scientist at FICO, said in an email. “FICO Score 9 ignores paid collection agency accounts, and it takes a sophisticated approach to differentiating medical from non-medical collection agency accounts. This helps ensure that medical collections have a lower impact on the FICO Score, commensurate with the credit risk they represent.”

But it bears repeating: A forgiven debt does not mean there are no consequences for failing to pay the debt.

Paying Old Debt

The fact that debt-purchases-for-forgiveness often involve out-of-statute debt raises interesting questions as well. Generally, consumers have no legal obligation pay such debt. (The statute of limitations timeframe varies by state.) That’s why it is the “cheapest” form of debt for buyers (including Oliver and Jubilee) to buy. When debt buyers try to collect on it, it’s often called zombie debt, and many consumers are tricked into paying when they don’t have to.

Even a small payment towards the debt restarts the statute of limitations, so any consumer who receives a collector call should immediately identify the age of the debt and the applicable statute of limitations.

When Oliver purchased such debt, he was paying a collector who had no right to collect on it. Rainbow Jubilee faced criticism for making such payments, too, which could be seen as helping fund collectors’ illegitimate activity. And the “relief” offered to indebted consumers was already guaranteed by law.

The Tax Implications

Generally, when a debtor forgives a consumers’ debt — say, through debt settlement — the amount of forgiveness is considered income by the IRS. It can be a real kick in the teeth to consumers, who obviously are in no position to pay income tax on the amount they couldn’t pay to a debt collector. But for now, this is the law.

This is sometimes referred to as the 1099-C problem. Financial institutions must issue 1099-C forms to consumers any time they agree to accept at least $600 less than they are owed, and consumers must “claim” that amount on their tax returns.

When Rainbow Jubilee began its debt purchases, the organization said it had consulted with the IRS and was told there was no 1099-C problem. At the time, not everyone agreed. Writing on the blog NakedCapitalism.com, Yves Smith argued that many complex tax issues aren’t settled with the IRS until it makes a formal ruling, and any issues with this kind of novel debt forgiveness were unclear.

While a non-profit may not be required to issue a 1099-C for the “gift” of debt forgiveness, it’s still possible that recipients would have to declare the amount as income. Smith wasn’t saying these consumers had a tax problem, she was merely questioning Jubilee’s certainty that they wouldn’t have one.

On his show, Oliver said that RIPMedicalDebt specialized in debt forgiveness “with no tax consequences.” It is unclear how, however. The organization’s website doesn’t seem to address it. A phone call and an email to the organization were not immediately returned. (That’s not necessarily suspicious — the non-profit’s website was down Monday afternoon, no doubt because it was flooded with traffic in the aftermath of Oliver’s segment). Attempts to reach Rainbow Jubilee have been unsuccessful.

An email to Yves Smith about the issue has also gone unanswered. It’s worth noting that we were unable to find any complaints about unexpected tax issues for recipients of this kind of debt forgiveness.

Can’t Target the Benefit 

It’s also worth noting that while buying up debt for pennies on the dollar and forgiving it is definitely good news for the beneficiary, it would be very hard to “target” such debt relief to a particular person. You can’t buy a specific individual’s sold-off debt, for example. The purchases generally involve large spreadsheets with thousands of consumers’ personal information; a good amount of luck would be involved in buying a set of debts that includes a particular person you might be trying to help.

Still, Oliver’s show highlighted many of the absurdities of debt collection, and the alarming practices of some collectors – a subject we’ve covered extensively in the Credit.com Debt Collection Files.

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John Oliver Just Bought $15 Million in Medical Debt for $60K — & Forgave It All

john-oliver-bought-medical-debt

Medical debt affects many people’s lives. And repaying what you owe can get more complex and stressful when that debt gets sent to collections. On Sunday’s Last Week Tonight, host John Oliver tackled the issue of medical debt in an unexpected way.

“Clearly, if you have debts, you should pay them if you can,” he starts off in the segment. “But many people can find themselves in debt through no direct fault of their own.”

From here, Oliver delves into the practice of debt selling, in which companies purchase billions of dollars of debt from creditors, often for pennies on the dollar. According to the segment (which you can see in full below), consumers’ information tied to the debt — such as their name, address and Social Security number — often passes through several hands without being verified.

As a result, consumers can find themselves being sued for debt they don’t recognize, out-of-statute debt (“debt that’s so old you can no longer be sued for it,” Oliver notes), debt that they’d already paid off or debt they took care of in bankruptcy. This type of debt is often called “zombie debt”, or old debt thought to be settled and buried.

Once a company has purchased the debt, they’ll typically try to collect it themselves or hire a debt collector to help. Many collectors work in the bounds of the law, Oliver says, but sometimes, illegal tactics, such as leaving threatening voicemails, are utilized to get consumers to repay.

The debt-buyers’ trade group, DBA International, told Oliver the industry is working to regulate itself. (It did not respond immediately to Credit.com’s request for follow-up comment.)

The barrier to entry into the debt collection business is low, Oliver says. To illustrate this point, in April, Oliver’s team spent $50 to incorporate a debt acquisition company online in Mississippi. He named it Central Asset Recovery Professionals. Soon, the company was offered a portfolio of nearly $15 million of medical debt from Texas at a cost of less than $60,000. For that amount, CARP would receive the names, addresses and Social Security numbers of nearly 9,000 people.

Following the purchase, Oliver could have easily had employees start calling people, “turning their lives upside down over medical debt they did not have to pay,” he said. But instead, at the end of the segment, he decides to give it away.

Dealing With Debt

Those whose debt was purchased by Oliver could be considered lucky, but many people aren’t when it comes to paying back certain bills. If you’re dealing with medical debt, it’s important to remember to review your credit reports annually and check your credit scores on a regular basis to see how it may be affecting your credit. (You can view two of your credit scores, updated each month, for free on Credit.com.)

And, if you are dealing with debt collectors, it can help to know your rights. You can find a crash course on debt collection here.

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Image: YouTube screenshot

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