Many of you are aware of the fact that now that it is 2008, many adjustable-rate mortgages will be resetting. As a result, many homeowners will not be able to make their mortgage payments. (And, very, very few of them will qualify for the anemic federal program ostensibly designed to help them out of this mess.)
Many of these homes will be middle and lower class taxpayers who will receive 1099-C statements of forgiven debt. What bothers me is that the forgiven value of the debt on the home are nothing more than fantasies. Much of the appraised values of these homes were driven by fraud in the market. I was reminded of this when I saw when I saw this story in the L.A. Times.
I think that fraudulent home appraisals contributed more to the run-up in home values than has generally been accepted.
Forgiven credit card debt is also considered part of this scheme. What is also so insidious about this is that many hospitals are turning to credit card companies to collect medical debt.
What compounds the issue of lack of affordability of medical care is the fact that those without insurance get charged far more than those with insurance. With the advent of forgiveness of medical debt, Americans who couldn't afford medical care to begin with will be required to pay taxes on the forgiven medical debt (including interest charges).
My points are:
- Debt forgiveness taxes will be foisted on Americans who already have difficulty paying living expenses.
- Many of the "values" that form the basis of the debt forgiven will be based on inflated and excessive -- even fraudulent -- assessments. This is true even when there is a compromised settlement in a debt dispute based on a consumer disputing improper charges.
- Because wealthier Americans rarely need to incur debt to pay for the necessities referenced here, they will not be subject to these taxes. Therefore, this is another way that middle and lower income Americans will have to shoulder a disproportionate tax burden based on this tax assessment.
- There is no effective means (that I am aware of) to protest the values reported to the IRS of forgiven debt. (i.e. the credit card company charged excessive fees or the homeowner was charged "junk fees", etc.)
- Taxes owed on forgiven debt is not dischargeable in bankruptcy (barring changes in the bankruptcy code).
Many people will argue that this is merely a "personal responsibility" issue and that people should have known better than to go into debt. The problem is that:
a) Many of these folks had no real choices (esp. medical debt).
b) Oftentimes credit cards used the "universal default" option (which is unilaterally foisted upon an unsuspecting consumer with no bargaining power) to ramp up debt obligations beyond a user's ability to pay.
c) Mortgage debts were being pushed by unethical practices in the mortgage industry who were in a much better position to understand the consequences of the loans they were doling out. They also understood (or should have understood) the future inability of consumers to repay the debt in the first place. (Not to mention the moral hazard of bailing them out via these poorer Americans taxes. This is often referred to as "privatization of profits and socialization of losses." You might say that Republicans can often be socialists when it's lower income people's money that is being socialized for their wealthy contributor's benefit.)
When the Democrats take over early next year, I hope that they will work toward reform of this area of the tax code.
***Update***
I should also mention that another thing that drove me to write this diary is the tax consequences of debt forgiveness was this post by Calculated Risk regarding the coming social acceptability of walking away from your debt.