How the New Tax Law Affects Debt Collections

Is it time to ask for the money? What America’s new tax law means for debt collectors
Have you noticed a little more money in your paycheck lately? Probably not. Physical checks are a relic of the past. Most employees are paid through direct deposit, and many don’t notice when deposits are made into their checking account. More likely, employees do pay attention to how much money they have in their account at the end of the month, quarter, or year.

This is where the tax reform advocated by congressional Republicans and the Trump administration comes into play. The $1.5 trillion Tax Cuts and Jobs Act, which was signed into law last December, means that the average American will see a total tax cut of $1,610 in 2018, according to the Tax Policy Center (TPC).

It’s a Good Time to Ask for the Money
From a debt collector’s perspective, it would be intuitive to think that Americans’ newfound boost in after-tax income means it’s a perfect time to “ask for the money.” But is this true? As is the case with virtually all hot-button issues like tax reform, it depends on who you ask. Media pundits’ views on the new tax law range from touting it as an unprecedented economic boon for businesses and individuals alike, to slamming it as special-interest policy making that solely benefits the rich. For debt collectors and the debtors they’re looking to settle with, the reality is somewhere in between.

Corporate Tax Rate is Reduced by 40%
Now that many businesses are preparing to file their first quarter estimated taxes (due April 17) for 2018, they may start to realize that they have more money thanks to the new tax law, which cut the corporate income tax rate permanently from to 35 percent to 21 percent. Illustrating the magnitude of this change, billionaire investor Warren Buffett has said that the tax reform will save his company $29 billion. Therefore, when it comes to business-to-business debt, collectors should ask for the money today and plant the seed in the debtor’s mind that, indeed, now is the time to break free of that lingering debt.

How Does the Tax Reduction Effect Individuals?
For individual debtors, the picture is more complicated. Unlike the permanent tax cut for businesses, the Trump law’s cuts for individuals expire in 2026.

But for collectors, the message is the same: ask for the money today because the tables could be turned in a decade, with taxpayers potentially facing a tax rate that is either the same as it was in 2017 (before the Trump law’s passage) or higher than it was in 2017. This could be a shock and strain for individual debtors, decreasing their willingness to settle with collectors.

At the same time, there are several factors that could minimize individuals’ willingness to pay their debts, even under the current law. Take the example of an individual who earns $50,000 per year. According to CNN’s tax calculator, the tax reform saves that individual $1,350 annually, or about $52 per paycheck twice a month. Even if an employee does notice that level of increase in a direct deposit payment, will $52 provide enough incentive to settle a debt that may reach the thousands?

Let’s stay with the example of this “middle class” $50,000 earner. The TPC says that 65.8 percent of the new law’s total federal tax benefit is going to the nation’s top 20 percent of earners, meaning that the legislation’s impact on middle class and low-income debtors—and the collection agencies pursuing them—could be limited.

The tax implications of the debt-settlement process also play a role here. Collectors that agree to accept at least $600 less than the original balance they are owed are legally required to file 1099-C forms, and the portion of the debt that is forgiven by the collectors is considered taxable income for debtors. This, too, could minimize debtors’ willingness to reach agreements with collectors.

Ask for the Money Today
Nevertheless, despite these mitigating factors, the new tax law’s message for consumer debt is ultimately the same as it is for business-to-business debt: ask for the money today. Yes, the average taxpayer—let’s again use the $50,000 earner—might not notice the extra $52 per paycheck or $104 per month in income. But what if they do notice? Why not ask for half of the debt now, before consumers assimilate the extra income into their monthly expenditures? There’s no downside to asking. And from a debtor’s perspective, having a portion of your debt forgiven is found money—even if it’s taxable income.

Here’s the bottom line for collectors: Whether you’re dealing with business debt or consumer debt, ask for the money today, or else you risk a future deterioration in the potentially fertile market created by the new tax law.

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