The deliciousness of Rolling Jubilee
What to make of Rolling Jubilee, the latest bright idea from Occupy? The idea is simple:
Banks sell debt for pennies on the dollar on a shadowy speculative market of debt buyers who then turn around and try to collect the full amount from debtors. The Rolling Jubilee intervenes by buying debt, keeping it out of the hands of collectors, and then abolishing it.
Rolling Jubilee has already raised $115,000 — which they say is enough money to buy and cancel more than $2.3 million of debt. After Thursday’s variety show and telethon, both sums will surely rise substantially.
The reaction from the financial press has been mixed. Tim Worstall somehow contrives to admire the idea while bashing everything else associated with Occupy at the same time; Nick Summers, on the other hand, thinks it’s fundamentally misguided.
A person’s debt can’t truly disappear with no consequences. The amount forgiven is technically income—“cancellation of debt income,” in Internal Revenue Service terms. It’s a dollar-for-dollar conversion, says Robert Willens, a tax expert based in New York. For example, a person with regular income of $50,000 who has $25,000 in credit-card debt discharged will be taxed on April 15 as if she earns $75,000.
“There’s not any doubt about the tax outcome at all,” says Willens. “That’s almost always the case with debt discharges—you wind up with this tax problem that almost always mitigates the benefit of the discharge.”
Summers didn’t speak to anybody at Strike Debt, which is organizing this jubilee, but he could at least have scrolled down to the Rolling Jubilee FAQ:
Will the Rolling Jubilee have to file a 1099-C Cancellation of Debt form with the IRS?
No. The Rolling Jubilee will earn no income from the lending of money and is therefore exempt from filing a Form 1099-C under the Internal Revenue Code Section 6050P.
In other words, there will not be any tax consequences to what Strike Debt is doing, on the perfectly legal grounds, as Worstall has found in the tax code, that “you do not have income from canceled debt if the cancellation or forgiveness of the debt is a gift”.
To put it another way, the debtors will no more have to pay income tax on the forgiven debt than they would have to pay income tax if I gave them a gift of that money. What’s more, Strike Debt won’t report the cancellation to the IRS, and the debtor will probably not know that their debt has been forgiven. Given all that, the chances of the IRS coming after the debtor for income tax on the forgiven debt are exactly zero.
Still, that raises Matt Yglesias‘s question. Let’s say there’s a family with $20,000 of debt which is so old and unrecoverable that it’s selling for a mere 5 cents on the dollar. What would make that family better off: forgiving that debt, or giving them a gift of $1,000 in cash?
The answer is that the question misses the point, rather. The point of Rolling Jubilee is that it’s doing secret random debt forgiveness, not because that’s the most effective way to help out struggling indebted Americans, but because it’s about time that ordinary Americans started getting help with their liabilities rather than just too-big-to-fail financial institutions. Strike Debt is trying to build what it calls “a growing collective resistance to the debt system” — and this exercise is part of what you might consider a broad politically-motivated deleveraging, a way of taking power back from the creditor classes (a/k/a the banks).
The scheme isn’t conceptually perfect: as Strike Debt themselves say, the very fact that they can buy up debt for pennies on the dollar in the first place is “part of the scandal that we are trying to highlight”, and yet it’s also something they are ratifying with their participation. And anybody who’s read Jeff Horwitz’s wonderful series on the debts which were sold by Chase will know that much of the time the “debts” which are being bought aren’t actually legitimate debts at all. For instance, it’s alleged that Chase systematically shredded incoming correspondence such as records of borrower payments and counter-judgments extinguishing debts, before selling those debts on to collectors. Horwitz reckons that at Chase alone, billions of dollars of outstanding claims have highly questionable legitimacy.
As a result, Strike Debt will probably, at some point, end up paying banks for debts which aren’t legitimate at all: indeed, if they’re looking for the debt which trades at the lowest levels on the pennies-per-dollar market, they’re likely to be buying the most dubious debts, on an “as is” basis.
So the symbolism here is in some ways more important than the actual results, which pretty much by definition are unknown and unknowable. Still, that’s one of the reasons I like this scheme. In a world where philanthropy is increasingly run by business professionals who want to measure results and return on investment, this is a refreshing throwback from a time where you would just do some good in the world and that was that. US households have too much debt; this reduces their debt burden; therefore it’s a good thing — especially seeing as how it also acts as a focal point and rallying cry for a much broader agenda.
That agenda is not represented in Washington: neither Democrats nor Republicans have any desire to touch Occupy with a 20-foot pole. But it’s an agenda which has real popular support all the same, from people who are fed up with seeing bankers get rich even as real median incomes stagnate for decades.
And that’s why I think the idea behind the Rolling Jubilee is so delicious. It’s a group of ordinary people who are perfectly happy to help banks lose 95 cents on the dollar by paying them the other 5 cents, and then forgiving the loan entirely. Of course, the banks know that some percentage of their loans will go bad, and, especially in the case of credit card debt, they will often have made a net profit on the account long before they sell off the dregs for 5 cents on the dollar. But even if the banks aren’t being hurt at all, it still feels great to have the opportunity to be an anti-bank for once. There’s something very good about forgiveness.