Meet Fee-Fighting Vigilante Molly Katchpole
She took on Bank of America and then Verizon over fees By Minda Zetlin
If it weren’t for Molly Katchpole, we might all be paying some sort of fee for using our debit cards.
In October 2011, Bank of America announced its intention to charge some customers who used debit cards $5 a month for the privilege, and several other large banks said they planned a similar move. It was Katchpole, a recent college graduate working two part-time jobs, who posted a petition on Change.org demanding that the bank rescind the fee that forced the bank to change plans.
“The American people bailed out Bank of America during a financial crisis the banks helped create. And now your bank is profiting,” read the petition. Four-and-a-half weeks and 306,000 signatures later, Bank of America announced it was canceling its controversial fee.
Fast forward to Dec. 29, 2011, when Verizon Wireless announced it would begin charging customers $2 for making one-time credit or debit card payments online or over the phone using its automated system. The move was intended to force customers into using its auto-pay option instead. This time, instead of weeks, it took less than a day for Verizon to reverse its course. The mobile giant changed its mind after another petition posted by Katchpole collected more than 160,000 signatures in less than 12 hours.
CreditCards.com caught up with Katchpole to talk about her motivations and her personal finance philosophy.
CreditCards.com: What inspired you to start the petition against the Bank of America debit card fee?
Molly Katchpole: I was hanging around online reading the news, and saw Bank of America was planning this new fee in early 2012. They didn’t really give any explanation, and I couldn’t think of any except that they wanted more profit. So I went to Change.org. I had signed a couple of petitions there and knew they’d had a lot of victories in the past. I wrote up a petition, it went up and within a couple of days it had tens of thousands of signatures.
After about a week, I closed my bank account. The media really liked that, and I started getting a lot of press attention for it. I think I became the face of the whole thing. Sometimes when there’s a lot of customer upheaval, there’s no face to it, but I think that’s what I was.
After about two and a half weeks, a Bank of America executive called me up. He wanted to explain the fee to me, and we talked on the phone for about 25 minutes. It was a weird conversation because I didn’t really believe anything he said. It all sounded very scripted.
CreditCards.com: What explanation did he give?
Molly Katchpole: He said that they wanted to be more transparent with their fees. But that’s not an actual reason. They’re trying to be more transparent with their fees so they’re announcing this one, but it doesn’t explain the fee itself. To be honest, I think Bank of America handled the whole situation very poorly. It took them a while to say anything at all. It was like a train wreck for them.
After a month, three other big banks that had been [intending] to impose a debit card fee backed down, and after three more days, Bank of America backed down, too.
CreditCards.com: What do you think made it possible for you to have such a huge effect?
Molly Katchpole: Change.org was wonderful because it has a huge email list. It’s a way to reach a lot of people who sign petitions. Occupy Wall Street was going really strong at the time and that had a lot to do with it. Bank Transfer Day, a movement for people to transfer their accounts from big banks to community banks or credit unions had been announced, so that certainly helped. You had hundreds of thousands of people leaving their banks. They were getting awful press.
It also had a lot to do with the timing. They had just raked in $2 billion of profit the previous quarter. And a lot of people in America are in a really bad slump right now, deeply in debt or with their houses underwater. I don’t think they were expecting the amount of backlash they got.
CreditCards.com: With Verizon Wireless, it took less than a day for the company to cancel its plan to impose its $2 billing fee. And it appears the phrase that scared them out of it was “Molly Katchpole.”
Molly Katchpole: I would love to think that! But people were extremely upset. The petition I put up was doing even better than the Bank of America one had. A lot of people say that big companies don’t pay attention to that kind of stuff. They absolutely pay attention. When I talked to the Bank of America executive, he said they noticed my petition the first day or two that it was up.
A petition is a concrete collection of people who are upset. You don’t have to look on Twitter or Facebook to see how many people are upset, although you can do that, too. But Verizon could see over 160,000 people had signed the petition. I think that definitely had something to do with their decision. Verizon was also being investigated by the Federal Communications Commission over the fee.
CreditCards.com: You had two part-time jobs at the time the Bank of America fee was announced. What were they?
Molly Katchpole: I was a nanny. I was also working for a political public relations firm, which was just me and one other woman. It was really great, but it was freelance and it varied each week.
CreditCards.com: Do you think working for that PR firm gave you insight into how to do this?
Molly Katchpole: No. And when I was in college, I didn’t study anything that had to do with politics. My degree is in art and architectural history. But I was always an activist at heart, and I’ve been using Twitter for a long time. I’ve been using social networks and the Internet since I was in middle school. I think my generation is programmed to use the Internet for this kind of stuff.
CreditCards.com: So anyone could do what you did?
Molly Katchpole: Yes. I really want people to do it, but we need to be strategic and not go after every single thing. There’s something to be said for writing down how you’re feeling about something. If you look at the petitions, I list why the fees are wrong. I think that’s an effective approach. We need to be able to mix emotions with facts and hard lines of reasons. We need to be as strategic as these companies are being.
CreditCards.com: What are you doing now?
Molly Katchpole: I’m a fellow at a nonprofit called Rebuild the Dream. I’m on a team that creates campaigns and petitions. I’d been following Rebuild the Dream since it started and had applied for a fellowship but not heard back. Then I did hear back at the end of the first petition — I think maybe they saw it — and they hired me as a fellow.
CreditCards.com: What is your own personal finance philosophy?
My personal finance philosophy all along has been to live below my means. So just because I can afford to go out every day and get coffee at Dunkin Donuts, or go out to eat two nights a week, doesn’t mean that I should. I learned that from my parents.
Molly Katchpole: That’s a really interesting question that I’ve never been asked. I absolutely do! I grew up in a working, middle-class family and learned a lot from my parents. My mother was excellent at handling our money and my parents had beyond perfect credit. They knew how important it is to be as financially independent as possible.
When I was in high school, I always had a job. When I was in college, I had a work-study job as part of my financial aid. I worked in the summers. My personal finance philosophy all along has been to live below my means. So just because I can afford to go out every day and get coffee at Dunkin Donuts, or go out to eat two nights a week, doesn’t mean that I should. I learned that from my parents. Our vacations were always a lot of fun. We would go to Vermont and have a little cabin for a week, but it was never extravagant.
My dad’s a machinist and my mom’s a physical therapist’s assistant. There weren’t tons of extras, but we lived very comfortably. I’m worried that people in my generation who are working those types of jobs might not be able to do that.
CreditCards.com: Do you have a lot of student debt from college?
Molly Katchpole: I have a 15-year repayment and $60,000 in debt. That sucks, and I don’t necessarily think it should be that way, but that’s how it is for me right now.
I’ve been at my job since the end of November, so I’m still in a grace period for paying back these loans, and am trying to save up money so I can pay them back. I have two private student loans and unsubsidized and subsidized Stafford federal loans. On one of my student loans, I owe $180 a month, and on the other $190 a month. I think when I consolidate my Stafford loans they will total about the same. If you pay a little more each month, it goes straight to principal. So I made the decision that I’m going to make it a nice and easy round number: $200 a month for each of those loans. That way, I can reduce the principal more quickly.
CreditCards.com: If you could imagine the perfect job for you to be in 10 years from now, what would it be?
Molly Katchpole: Working to uphold the working and middle class and make sure they don’t wither away is really, really important to me. I’d like to be able to do that.
I would also really like to be a teacher. Actually, there are a lot of different things that I’m interested in and am feeling it all out right now. I don’t know where I’m going to be in 10 years. And I’m OK with that.
1099-C surprise: IRS tax follows canceled debt
Forgiven credit card debt may be taxable income
By Connie Prater
If you thought your money woes ended last year when you settled that credit card debt, think again.
Avoiding 1099-C tax problems
What you should know: Have you negotiated with a creditor to pay less than you owe on a credit card debt? The IRS considers forgiven or canceled debt as taxable income.
What to do: Experts advise consumers to seek tax advice before negotiating credit card debt settlements to avoid a “surprise” tax hit from cancellation of debt.
For many consumers with debt problems, after the debt collector leaves their lives, the taxman arrives.
Months after successfully resolving credit card debts, consumers have received 1099-C “cancellation of debt” tax notices in the mail. Why? The U.S. Internal Revenue Service considers forgiven or canceled debt as income. Creditors and debt collectors who agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS and to send debtors notices as well. Taxpayers must report that “income” on their federal income tax returns.
“A lot of people don’t realize they have any tax issues at all when they are going through this,” says Alison Flores, a researcher at The Tax Institute at H&R Block, the nation’s largest tax preparation service. “They say ‘I’m really poor, I’m broke and I can’t pay my bills. How can you consider this income?'”
It is, according to the Internal Revenue Code. For example, a person with $10,000 in credit card debt who negotiates to pay only $6,000 of the balance would have $4,000 in forgiven debt income. That $4,000 must be reported as “other income” on Line 21 of the 1040 tax form. Depending on the amount of debt forgiven, the taxpayer’s income level, deductions and other factors, the consumer could face a sizable tax bill come mid-April.
Surprise tax problem
The problem: Many consumers have no clue what the 1099-C forms are, and some may be trashing the cancellation of debt notices because the forms are sent by creditors or debt collectors with whom they thought they no longer had business. Still others are not filing the 1099-Cs with their federal income tax returns — putting taxpayers at risk for IRS audits, penalties and fines. Consumer credit counselors and tax attorneys say few consumers are aware of the tax implications of settling to pay a lesser amount than they owe in credit card debt.
“It’s truly something that consumers need to be aware of, as they are often blindsided by it,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, a nationwide group of nonprofit credit counseling agencies. “Just when they think the debt monkey is off their back, here comes the IRS obligation.”
The number of “surprise” tax problems is growing as the amount of bad debt rises amid a nationwide credit crisis.
According to the IRS, the number of 1099-C cancellation of debt forms filed with the federal government by creditors and debt collectors nearly tripled between 2003 and 2009. The IRS received fewer than 1 million forms in 2003 and more than 2.673 million in 2009 The projected number for 2010 is 2.8 million (see chart). The IRS expects to get 3.1 million debt forgiveness forms by 2012. Part of the spike may be due to the rise in mortgage foreclosures, but a major portion of it is also attributed to credit card debt.
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Debt forgiveness leads to rise in 1099-C filings
Canceled and forgiven debt may be taxable income for
some consumers. According to the IRS, the number of taxpayers filing debt cancellation forms nearly tripled between 2003 and 2009. The IRS estimates the volume of filings will continue to climb into 2012, when they will hit a projected 3.11 million. Source: Internal Revenue Service, Analysis and Statistics, Office of Research, Forecasting and Service Analysis |
Negotiating with creditors, debt collectors and debt buyers to pay a fraction of the amount owed is a common practice in the industry, often accomplished through third-party agents such as consumer credit counselors or debt settlement specialists.
“Debt buyers are willing to negotiate a discount, sometimes at a very significant discount off the entire balance, to settle the debt,” says Barbara Sinsley, general counsel for the 600-member Debt Buyers Association (DBA International), a trade group of companies that buy and sell portfolios of debt from banks and other creditors.
Seek advice immediately
Consumers who receive the 1099-C cancellation of debt forms should immediately take them to a tax preparer or tax adviser, experts say.
“Make sure your tax preparer understands the rules related to these type of activities,” says Mark Steber, vice president of tax resources for Jackson Hewitt tax preparation service. “Ask to talk to an office manager. Tell them ‘I need to see someone who understands this type of situation.'”
Taxpayers may qualify for one of several exclusions that allow them to reduce taxable income from canceled debts. If the exclusions apply, they must file an IRS form 982 in addition to the 1099-C.
“Theoretically, you have income if you don’t meet one of the exceptions,” says Eric L. Green, a tax attorney with the Convicer & Percy law firm in Glastonbury, Conn.
The exclusions include debts discharged during bankruptcy and debts of consumers who are insolvent (meaning their liabilities exceed their assets) prior to the cancellation of debt. However, the exclusion applies only up to the amount by which consumers are insolvent. That means if $5,000 in debts were forgiven and liabilities exceeded assets by $2,000, then the $2,000 would be excluded as income. “The remaining $3,000 would be reported under other income,” says H&R Block’s Flores.
Debt resolution tax tips
* Consult with a tax adviser before finalizing debt settlement agreements to find out the potential tax implications. Ask for a tax preparer who is knowledgeable about 1099-Cs.
* Clarify with the creditor or debt collector the exact amount that will be declared on the 1099-C form.
* Be aware that the 1099-C is coming. Don’t throw it away. Take it to your tax preparer.
* If there is a dispute about the amount reported on the form, contact the creditor or debt collector immediately to resolve the matter. Ask for a corrected 1099-C form.
Homeowners who default on mortgage loans may also qualify for exclusion of their foreclosures under the Mortgage Forgiveness Debt Relief Act, which took effect Dec. 20, 2007, to help homeowners caught in the mortgage crisis. This provision applies to debt forgiven in calendar years 2007 through 2012.
Other exclusions are for certain farm debt, student loans and real property business debts.
Informing consumers
Much of the surprise element of the 1099-C cancellation of debt forms could be eliminated, say tax preparers, if all creditors and debt buyers routinely informed consumers that there could be tax ramifications when settling debts for discounted amounts.
At Wells Fargo, one of the nation’s five largest credit card issuers, all settlement-offer letters include disclosure of possible 1099-C implications, according to Lisa B. Westermann, assistant vice president of public relations for Wells Fargo Card Services. Other credit card issuers did not respond to requests for information about their policies.
“The bank doesn’t tell you,” says Green, the Connecticut tax attorney. “From the bank’s perspective, it’s not their job to give tax advice.”
Says Sinsley from the debt buyers group: “There is no current law that says that a debt buyer must disclose that a 1099-C would be forthcoming after the settlement of debt.”
She says debt buyers have been sued for the unlicensed practice of law after giving consumers advice on resolving their debts. It’s something she advises her members to avoid. “A debt buyer is not the consumer’s financial planner,” she says. “Everybody’s financial situation should be discussed with a tax adviser.”
Knowing the amount of forgiven debt to be reported to the IRS would help consumers plan ahead, Sinsley says. “When they are negotiating the settlement of the debt, the consumer can discuss with their tax adviser what consequences there would be in exchange for the settlement of the debt,” she says. “If the consumer is settling a debt, and they know the settlement is X and the forgiveness is Y, they can go to their tax preparer and say, ‘If I do this, what is my tax impact?'”
The IRS has released numerous publications and bulletins about 1099-Cs, IRS spokeswoman Theresa Branscome says. However, many of those publications have focused on mortgage forgiveness rather than credit card debt.
Check the figures
Another tip from tax preparers: Make sure that the amount of canceled debt listed on the 1099-C form is accurate.
“Make sure that you agree with the numbers,” says Steber from Jackson Hewitt. “They can include interest on the debt that hasn’t been paid for a while.” If there is a discrepancy, Steber says, “you better go back and talk to them now and find out what it is.”
Another potential problem: receiving a 1099-C before the debt is actually paid off. According to Lauren Saunders, managing attorney for the National Consumer Law Center, creditors have sent cancellation of debt forms to consumers at the point that the credit card issuers charged off the debt and sold it to debt buyers. “The consumer is potentially liable both for taxes on supposedly forgiven debt while continuing to be liable for the debt,” Saunders says. “We’ve had calls about that situation. Seems like you can’t have it both ways: Either you forgive it or sell it but not both.”
Consumers who receive 1099-Cs in error may request that creditors or debt buyers send corrected forms to the IRS, but the situation leads to confusion and complications for consumers, according to the law center.
Several tax advisers called the 1099-C requirements unfair to consumers trying to overcome mountains of debt. Others say the tax rule is further proof that there is no free ride and consumers who borrow money must be prepared to live up to their financial obligations.
The bottom line on 1099-Cs, says tax attorney Green: “Be aware and prepare for it. When you receive that form, go immediately to a tax adviser. Don’t ignore it. That has real dollars and cents consequences.”
Does ‘good’ debt really exist?
Some experts say the recession has changed how debt should be viewed
By Marcia Frellick
Does “good” debt exist anymore? Financial experts differ, but many say that in today’s economy, it’s time to reconsider how we look at some common types of debt.
Traditional thinking separates debt into “good” and “bad.” Mortgages and student loans have been considered good debt because they have fairly low interest rates and hold the promise of a substantial long-term payoff. Auto loans and credit card debt usually rate a bad debt label.
But with unemployment hovering around 9 percent, housing prices falling nationwide and the average cost for a four-year private education soaring to an average of just more than $37,000 a year, according to the College Board, does good debt really exist anymore?
Noted personal finance author David Bach says no. The recession, he says, taught us that “all debt is bad if you can’t pay it off.”
“With many Americans today, almost 30 to 50 percent of their paycheck is going just to interest payments,” says Bach, whose latest book is “Debt Free For Life.” “Often it’s more than that. There’s been a real awakening that debt is bad.”
Others say good debt still exists, that buying a house is still a sound investment over the long haul, and borrowing for a college education is a good risk — if you keep borrowing down and study for a profession that can pay it off.
Here are some ways the debate shakes out:
Cars and credit cards
In terms of bad debt, financial experts agree that a large amount of auto loan debt is hard to justify. If you have to have a car to get a job, then get a cheap car, but borrow as little as possible. Borrowing money at high interest to pay for a depreciating asset just doesn’t make financial sense, they say. But there is more debate on credit card debt.
Jordan Goodman, author of “Master Your Debt,” warns against it. “If you’re paying 18 or 25 or 29 percent, it’s hard to imagine what you’d invest in that would pay you more than 29 percent reliably,” he says. “And, of course, it’s not (tax) deductible.”
But Lita Epstein, author of “The Complete Idiot’s Guide to Improving Your Credit Score,” says credit card debt isn’t all bad if it helps you establish a solid credit history that will help you with big purchases later: “Generally, you get your best credit score when you use 10 to 20 percent of your credit limit,” she says. “That shows any creditor who’s considering you that you know how to manage your credit wisely, you know how to pay your bills on time and you’re not going to get yourself in over your head.”
Robert Pagliarini, president of Pacifica Wealth Advisors in Los Angeles, says credit card debt is good if it will make you money. Period. He gave an example of buying a piano on credit so that you may give piano lessons.
“Why wait four years to save up and buy the piano, when you can buy it on credit now and make some money? This is what businesses do. They borrow money … so they can invest it into research, into assets so they can make more money. That’s what individuals need to do.”
Student loans: Good debt or bad debt?
Student loans are good debt, even as costs escalate, if you can expect to make a salary when you graduate that will allow you to pay off the debt within a few years, says Carol Roth, business strategist and author of “The Entrepreneur Equation.” In today’s economy, that may mean only taking on the debt only if you are entering a high-paying field or finding a less expensive college that will make the math work, she says.
You also have to consider that a college education pays off in other ways, she says. “There’s a value to having an education, to learn and to be a well-rounded person but only you can assign what that value is, based on your own circumstances.”
Personal finance columnist and author Liz Weston says there’s a rough dividing line between good student loan debt and bad: “Don’t borrow more than you can make in the first year of your career,” she says.
Pagliarini says student loans are still a good bet financially, even in a time of high unemployment.
“The research shows that the more education you get, the more you’re going to make long term,” he says.
He notes the national unemployment rate is an average and doesn’t fully illustrate the difference in unemployment among different education levels. “When you look at the people with bachelor’s degrees and above, that number just about drops in half.” In fact, Bureau of Labor Statistics numbers for February 2011 show unemployment rates for people with a high school diploma and no college to be 9.5 percent; it’s 4.3 percent for people with bachelor’s degrees and above.
Goodman says he agrees that on average people with college educations make more than people without. But the risk for making that choice has gotten too high, he says.
“People are taking on huge debt and, in the case of student loans, they’re not forgivable even in bankruptcy. The two debts you can’t get rid of are taxes and student loans.”
That debt burden is exactly what concerns Thomas Alexander, Finance Department chair at Northwood University in Midland, Mich. He says paying for a college education with student loans is no longer a good risk unless you’re entering high-paying fields, such as medicine, engineering or accounting.
“If someone is getting a degree in sociology or history — the chances of landing anything that would give them a high return is pretty small,” he says.
He says college is not for everyone and the better payoff may be skipping college and going into a trade.
“If you take a student who does not go to college and becomes a plumber or electrician — those guys are going to make more money than 75 percent of the college graduates, but we’ve made the feeling in this country that that is beneath them.”
Mortgages vs. renting
Goodman says taking on a mortgage is not a way to build wealth as it has been in the past.
“Home prices are falling — probably will continue to fall — and 25 percent of the population is underwater (the house is worth less than the amount of the loan). Home deductions [for interest] are overrated. You get a deduction at your tax bracket, so if your tax bracket is 25 percent, you’re still paying 75 cents on the dollar. If you’re not being bailed out by home-price appreciation, this may not be a good deal.”
Roth says it’s all about the math. She gives an example of buying a $275,000 home purchased with 25 percent down and taking out a 30-year mortgage at 4.5 percent. It will cost you $68,750 today to buy that home (that’s the 25 percent down), and you will pay out more than $376,000 over 30 years. Even if the home doesn’t appreciate in value, you will have an asset worth $275,000 at the end of 30 years. Rent at $1,500 a month over 30 years would be $540,000 and that would be without inevitable rent increases. There would also be no asset at the end.
That makes the beginnings of a case for why a mortgage is a good idea over the long haul, she says. “But you also have to ask yourself some questions,” she says, “such as what are you doing with the difference in money you spend on the mortgage (only $1,045 vs. $1,500 in rent)? That money may also be able to be invested. Do you have property taxes? That creates more costs. Do you have assessments? How much is maintenance on your home? Is homeowner’s insurance more than renter’s insurance?”
Answering those questions will help you make up your own mind about what qualifies as good debt.
Regardless of where financial experts stand on what’s good debt and bad debt, all agree working to pay it off as quickly as possible is a good idea.
“One thing that never backfires is paying down your debt,” Bach says. “It is the safest, simplest investment you can make.”
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