The Parable of the Workers in the Vineyard by Jacob de Wet

When I checked last, Rolling Jubilee had raised $456K, and hoped to use it to wipe out over $9.1 million of debt. Unfortunately, there is a risk that some debt forgiveness will be treated as income by the Internal Revenue Service. Yves Smith gives a detailed description of the problems, and urges Rolling Jubilee to spend the money it takes to hire a serious tax lawyer. I agree with her that the FAQ on the site isn’t satisfactory, and I hope the organizers will deal with the problem.

Even if they don’t, many of the beneficiaries will be OK. You only get the income problem to the extent that forgiveness of debt restores you to solvency. The IRS uses a complex rule about solvency which you can find here. Generally, the test is whether your liabilities exceed your assets. Your assets include all of your retirement accounts, even though they can’t be reached by creditors, and any equity you might have in property that is collateral for a debt. Then, you have income to the extent that after the debt forgiveness, you are made solvent.

For example, suppose you have a debt of 50K and total assets of 30K. If a creditor forgives 10K of debt, you are still insolvent, so no income. If the creditor forgives 20K, you are still not solvent, and again, no income. If the creditor forgives 25K, you have income of $5K. Obviously that isn’t a good thing.

Rolling Jubilee will not file the form the lender is supposed to file when it forgives debt. They may not be able to contact the debtor to say that they have forgiven the debt. In that case, the debtor might have income but not know it, and neither would the IRS. That defeats the point of forgiveness of debt, because the debtor is still worried about the debt. Still, it might solve the income problem unless the IRS forces Rolling Jubilee to file the forms. That is a major point raised by Yves Smith.

If Rolling Jubilee can find the debtor, there is another alternative. Suppose the debt is a deficiency balance from a bad mortgage loan. Forgiveness could easily be big enough to restore the debtor to solvency. The best solution in this case is for Rolling Jubilee to reach out to the debtor to find out how the mortgage came into existence, how the debtor was treated during while the mortgage was in default, and how the foreclosure was handled. It is highly likely that the debtor has valid defenses to the debt. It may have been a fraud from the outset, the debtor might have been abused by the servicer in the foreclosure process, and the foreclosure itself may have had serious defects. It is highly likely that the debtor has several potential defenses to the debt.

In this case, Rolling Jubilee and the debtor can enter into a settlement agreement in which both sides release each other from all claims. In that situation, there is no debt forgiveness. Instead, each side gives consideration to the other to avoid litigation and serious loss. The situation can be improved if the debtor provides a statement of assets and liabilities and a budget showing that collection of the amount owed is highly unlikely. It is further improved if the debtor pays something towards the debt. That money can be used by Rolling Jubilee to offset the expenses of reaching out and settling, or even to buy more debt.

The first purchases are of medical debt. In some cases that could be enough to restore a person to solvency. It too can be settled along the same lines. There may be defenses even to medical debt, because of the billing practices of the medical community or because the hospital screwed up on collecting from an insurance company. There are more novel defenses, such as duress, in that the person wound up getting treated while frightened by illness and unable to protect herself from predatory billing and overtreatment. Hospitals and doctors bill differently depending on a number of factors, so that may give rise to a defense.

Even if there are no valid defenses, there are delay and litigation possibilities and there are grave difficulties in collection. In this case, the financial information and a reasonable settlement amount will justify the settlement, producing no income. It has the added benefit of giving the debtor an opportunity to pay the debt relief forward, which is very important to many people.

Rolling Jubilee is a great idea and I hope it has legs. It could open the door to a discussion of the place of debt in a violently unequal society.