Bankruptcy Lawyer Bryan W. Stone answers the question: “What are my alternatives to bankruptcy?”
Last Week Tonight host John Oliver recently made headlines when he forgave nearly $15 million in medical debt for roughly 9,000 individuals in the “largest one-time giveaway in [TV] history.”
In the episode, Oliver took to task the predatory debt collection industry in his typical pointed, muckraking style. His methodology for forgiving the millions in debt mirrored the very same structure that debt collectors so often use: Oliver’s team set up a fake debt buying company called “Central Asset Recovery Professionals,” or “CARP,” after the bottom-feeder of the sea.
CARP then purchased $15 million in debt from banks for pennies on the dollar, as debt collection companies so often do. The debts are usually termed “zombie debts,” which the bank considers uncollectible. Purchasing all the debt cost the show about $60,000.
Normally what happens at that point is that the debt collection agency aggressively and frequently contacts the debtors, often stooping to illegal means to do so. Escaping from life-ruining debt collectors are one of the major forces that push individuals into bankruptcy. Instead, however, Oliver “forgave” the debts by transferring them to RIP Medical Debt, a 501(c)(3) non-profit organization that receives donations to relieve medical debts.
It was a valiant effort to highlight the incredibly deceptive and abusive debt collection industry. The legally and ethically questionable tactics debt collectors use have come under scrutiny numerous times in recent years. One debt collector in Pennsylvania, for example, was caught in 2010 having decorated its office to look like a fake courtroom to bully and mislead debtors into turning over bank accounts and car titles towards payment of their debts.
In addition, medical bills are increasingly a leading cause of individual bankruptcy petitions in the United States.
However, news outlets and debtor activist groups since the giveaway have criticized several deficiencies with Oliver’s scheme.
For starters, the debt “forgiveness” could actually come back to hurt the debtors. A Salon article pointed out this week that RIP Medical Debt, the nonprofit to which Oliver’s team transferred the debts, is actually still awaiting 501(c)(3) status from the IRS. If the IRS denies their nonprofit status, the borrowers could still be on the hook for their debts. Only tax-exempt organizations with nonprofit status can gift debtors forgiveness without handing down tax consequences to the debtor.
If RIP Medical Debt does not receive nonprofit status, it will be as if CARP simply discharged, or forgave the debts, which means the borrowers would be forced to report the forgiven debt on their taxes as earned income. This is the same problem with student loan debt, which if forgiven can trigger huge tax bills for individuals without the money to afford them.
There is also a heated debate that has been ongoing since the Occupy Wall Street movement attempted an almost identical debt forgiveness giveaway in 2012 about whether 501(c)(3) IRS tax exemption even covers debt forgiveness at all. Occupy Wall Street has also given Oliver grief for pirating their techniques without mentioning that they used them first.
Regardless of how the debtors in Oliver’s giveaway are ultimately impacted, the strategy is highlighting one overarching question: why is it so hard for individuals to leave behind long-ago debts and get a true fresh start? Banks clearly do it all the time, and corporations have a streamlined process for shedding their debts in bankruptcy.
Debtor activists have suggested other approaches that could accomplish more systemic change than the dubious “giveaways” like Oliver’s: More legal support and counseling for borrowers. Wider distribution and publicity of the Debt Resistors’ Operations Manual, a publication released by the Occupy movement to get debtors to better understand the debt collection system that is taking advantage of them. Using debt purchases to develop legal cases against the debt sellers.
Despite the criticism, Oliver’s segment on debt collection at least brought again to the forefront the massive issues within the industry. Even if the debtors involved in the giveaway are still on the hook for tax debt, hopefully it will help spur more longer-term solutions than Oprah-style debt forgiveness. A person shouldn’t have to pin their hopes on the odds of winning the lottery in order to free themselves from past debts.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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