HON. RON PAUL
IN THE HOUSE OF REPRESENTATIVES
THURSDAY, MAY 14, 2009
Madam Speaker, I rise to introduce legislation to help Americans struggling with consumer debt by excluding discharges of debt from the definition of taxable income. Currently, when someone is relieved of consumer debt, such as credit card debt, they are taxed on the forgiven debt. So, for example, if a credit card company agrees to forgive $12,000 of a $15,000 debt, the debtor's taxable income increases by $12,000--even though the debtor does not actually have an additional $12,000 in his or her bank account.
The only way for Americans to avoid turning cancelation of debt into a taxable event is by declaring bankruptcy or insolvency. Thus, the tax code's perverse incentives could cause more Americans to declare bankruptcy, which is neither in the best interest of the debtor or their creditors.
Madam Speaker, the tax code should not punish Americans who work out a settlement with their creditors that enables them to avoid bankruptcy. This is unfair to both the debtors and their creditors. I therefore encourage my colleagues to cosponsor my legislation removing discharged debt from the definition of taxable income.