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[ira01]

I have also never been of the opinion that you absolutely need a debt sale to write these off :

What do you know -- I did pretty good!  From: http://www.irs.gov/taxtopics/tc453.html

Topic 453 - Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expense. To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for income you expected to receive but did not because the amount was never included in your income. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift.

There are two kinds of bad debts – business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a short–term capital loss in Part 1 on Form 1040, Schedule D (PDF). It would be subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.

Based on that language, I have never thought that you absolutely need a debt sale to write off a PMI loan.   I haven't done a bunch of research reading cases, but my opinion is that if you have a loan that hasn't made a payment in over a year (or two if you really want to be cautious),  (and you had been picking up the interest as income when it was paying) you take the position that it is a bad debt.  

Although I am not in any way a tax expert (and no one should take anything I write as legal or tax advice), the problem I have with that argument is the language I put in red above.  4+ lates are not "totally worthless" (except the ones discharged in BK) because we know that Prosper will (eventually) sell them for something.  Thus, they seem to me to be "partially worthless" or (greatly) diminshed in value, but not totally worthless. 

[christoofar215]

Prosper might be doing other P2P lenders that pop up in the future if P2P lenders pool their systems together on pre-screening.

i.e.; default on any of the P2Ps, and your Social Security Number plus your bank account number is banned from P2P lending for life--unless of course you pay up on the old default.

Since the deadbeats are flocking to Prosper, who knows; by the time the ship does sink the most valuable jewel might be Prosper's internal database of borrower defaults.

P-----r needs to actually DO some pre-screening. Either in this thread or another, I stated as lenders that at the very minimum we should know what verification was performed for defaulted loans (of course, P-----r looks like they're getting around that by not having any "defaulted" loans - they just live in 4+ month late hell for life........)

I've posted my verification experience on my credit repair loan.   I got a 3-way call between myself, a Prosper VQ, and the customer support hotline for bank.  So Prosper knows I have a bank account and I am the sole signatory.   But then--no verification on the income--my stated income in the listing stat table--nevermind my side income, which I'm sure there's no manpower at Prosper to verify that stuff even if it is all paperwork that has been converted to electronic via Rightfax.

snake's test loan didn't even go that far.  I don't even think he got a pre-origination phone call.

That's got me rather ticked off.   I can't see how I could give Prosper more than 2K of my money given that they're only looking at some very basic information.   They should secure some more background data.   Choicepoint is a company that has records available online going way back to when you were an embryo [the Feds use CP heavily].   I would look at other consideration factors... detect folks who have back child support and alimony, deny listings to folks with active liens, active repossessions, any sort of fiduciary fraud convictions, limit borrowing amounts to people with prior BK and place more restrictions on 2nd loans, etc... that's a minimum.

To pay for this intensified screening, I'd want to see borrowers have to put down a $50 deposit for a listing, part of it refundable if it gets converted to a loan [the loan proceeds will be adjusted to reimburse].   If you are serious about community borrowing, then you should seriously pay money to put the listing up.  These guys with 10+ listings looking for the jackpot and go late on 0-3 payments are really dragging the whole marketplace down.


I am looking on the bright side, though.  I just might dump $3K into my Prosper account and bid on the shittiest HRs, only so that I can knock myself down enough in income taxes.   I didn't claim enough Home/Office expense this year and wound up with a lowly 2K refund when it's normally 5K.  I've solved that problem by getting a new high speed scanner and logging Home/Office stuff in GnuCash so my Schedule A next year with my annual city income tax + this will be nice and big next year.

[christoofar215]

ira:  But Prosper can't even sell its largest junk portfolio, ever.   JDBs are offering a pittance for it.


You know there's quite a number of JDBs in the Philly/New Jersey area, Penncro was one of them located near me, but they're more interested in credit card debt.   There's a bunch more just in this area; mostly because Wilimington, DE is close by.   How actively is Prosper actually looking for JDBs who want to take this on?   


I wouldn't feel uncomfortable on my state and federal income taxes to write my prosper bids off as expenses at the end of the year provided the loans are 5+ months late.  They are promissory notes, remember?   If they collect next year, then I'll report it as Other Income and just attach an attestation statement.

It should pass an audit easily.  Just print out every Prosper PDF statement you get from them and run highlighter over all the baddies you've written off.   When there's a sale the following year, add the recovery amount back to offset the loss you reported the previous year.   You won't be persecuted for that; you're treating your personal finances on a cash basis anyway.

[Mtnchick]

Let's not forget that P------r turned down Traveler's offer to pay MORE than a JDB for a particular loan.

If there are JDBs offering ANYTHING P------r just needs to suck it up and take it. IMO, they aren't taking these offers because they don't want their numbers to look like the crap they really are. IOW, they certainly aren't acting in OUR best interest, they are acting in theirs.

Honestly, I don't understand why people are still bidding and giving these people a dime in servicing fees.

[ira01]

So: should they have sold to the highest bidder for peanuts?

Add my vote to the "of course" pile.  The money is gone; let's clear it off the books.

By not selling it, Prosper is keeping their own figures inflated and misleading, and that bothers me more than getting 1 cent on the dollar.

It seems to me that two completely different issues are only being discussed lumped together here.  There are TWO issues:

1)  When (and under what circumstances, and for what minimum (if any) price) should Prosper sell the 4+month lates; and

2)  When should Prosper's default and other performance statistics reflect economic reality, rather than simply hew to
the (largely) irrelevant (for this purpose) distinction between stinky old lates that are sold and stinky old lates that could have been, but have not yet been, sold.

As everyone knows, I am one of Prosper's harshest critics when it comes to its misleading advertisements, misleading press releases, and its tendency to distort performance data in ways that always (surprise) favor Prosper (e.g., the shameful treatment of the 66 NAT loans).  Certainly, continuing to carry $6.5M of Late-4's on the books is highly advantageous to Prosper's PR spin; as I've noted in other threads, Prosper's default "rate" is going to roughly double after the debt sale, which must really worry them.  And it is very possible that Prosper is taking that into account in determining whether to sell the debt now, which breached Prosper's duties to lenders (which is to act in OUR best interest, not Prosper's).  

BUT, that doesn't mean that it HAS to be that way.  Prosper should separate these two issues, by treating all 4+ month lates as if they were defaulted for purposes of its performance statistics.  If any of these loans later make further payments, or even cure, they can be added back in to reflect that reality.  But in the meantime, the performance numbers should reflect the reality that we all know -- that 4+ month lates ARE defaults, in everything but name.  

If Prosper made that change, then it would eliminate the conflict of interest that Prosper currently has in setting the timing of the JDB sales, and it would allow more reasoned thought about the best way (and timing) for conducting debt sales.  As I've noted before, I'm not so sure that the debt should be sold off for 1.5% (or for the 0.5% that someone else suggested).  If it wasn't for Prosper's misleading treatment of Late-4's in its performance numbers, "clearing the loans off the books" would only matter on an annual basis, for tax purposes.

In other words, bama is 100% right.

Quoted for posterity!

[Mtnchick]

BUT, that doesn't mean that it HAS to be that way.  Prosper should separate these two issues, by treating all 4+ month lates as if they were defaulted for purposes of its performance statistics.  If any of these loans later make further payments, or even cure, they can be added back in to reflect that reality.  But in the meantime, the performance numbers should reflect the reality that we all know -- that 4+ month lates ARE defaults, in everything but name. 

If Prosper made that change, then it would eliminate the conflict of interest that Prosper currently has in setting the timing of the JDB sales, and it would allow more reasoned thought about the best way (and timing) for conducting debt sales.  As I've noted before, I'm not so sure that the debt should be sold off for 1.5% (or for the 0.5% that someone else suggested).  If it wasn't for Prosper's misleading treatment of Late-4's in its performance numbers, "clearing the loans off the books" would only matter on an annual basis, for tax purposes.

In other words, bama is 100% right.

Quoted for posterity!

I agree - if they would consider the 4+ month lates (or even the 6+ month lates for you optimists who feel these deadbeats are going to win the lottery and pay the debts off) as "defaults" in their business numbers, I could deal a bit better with it. As it is now, it seems keeping them OFF the "default" page is the only reason why they aren't selling them. After all, it's the lenders that lose if they sell for a penny each - why is P-----r acting like they suddenly give a crap about the lenders? 

[ira01]

The odds that anyone will make a payment is slim, and 98% will get no payments.

It's actually 12 payments collected from 1100+ loans.Thats somewhere in the 99% range.

Meanwhile 6.5 million in loans languish because they want more time because they got money out of 12.

Lets assume they lose 3% of value per month.

That would make this group of loans lose $6,500 per day in value,while we wait for them to collect on 12 loans.

ETA: I dumbed the math down so Prosper employees could understand it.

I think you dumbed it down too much -- the loss is nowhere near this much.  I have no idea if your 3% number is correct, but whatever the number, you are erroneously applying it to the total defaulted loans, rather than to the JDB value of such loans.  

There is $6.5M of Late-4's.  I can't remember exactly what the average recovery from December's JDB sale was, but I do remember it was considerably less than in the past (lifetime, average JDB recovery was about 16%, but each sale gets worse).  Let's say it was 10% in December (which I think is pretty close).  That means that $6.5M in Late-4's would have been worth $650K in the last debt sale.  If that value goes down 3% a month as you suggest, the decline is $19,500 per month, or $650 per day.  Obviously still not a good result for lenders, but not the $6,500 you state -- let's at least get the math right.

[christoofar215]

ira/chick:

One factor that has to be looked at is the current economic picture.   Defaults on all types of credit products are going up astronomically.   Credit card companies were hedging themselves LAST year and the year before by jacking up interest rates while people were still tapping HELOCs and the like.   They've got decent cash reserves now, but AMEX reported last week that their own defaults are going way up... more than expected.   That's probably only going to get worse.   AMEX is one of the best CCs issuers out there, so you can imagine what the bottom heap of the CC market is like.  JDBs don't have to bid up anymore to get big blocks of nice fresh accounts with borrowers who have fairly decent credit scores.

And here comes Prosper, with deadbeat borrowers with mediocre credit, and they're large signature loans [CC consolidation] so the borrowers are more likely to hide.


I think Prosper would be better off with doing more random lawsuits right now... at the risk of a BK spike.

[Xenon481]

Prosper should also consider all loans with a Bankruptcy tag on them as defaults for reporting purposes.  I have a loan that is in BK that has not been  "defaulted" and hasn't made a payment since January 2007.

[Mtnchick]

ira/chick:

One factor that has to be looked at is the current economic picture.   Defaults on all types of credit products are going up astronomically.   Credit card companies were hedging themselves LAST year and the year before by jacking up interest rates while people were still tapping HELOCs and the like.   They've got decent cash reserves now, but AMEX reported last week that their own defaults are going way up... more than expected.   That's probably only going to get worse.   AMEX is one of the best CCs issuers out there, so you can imagine what the bottom heap of the CC market is like.  JDBs don't have to bid up anymore to get big blocks of nice fresh accounts with borrowers who have fairly decent credit scores.

And here comes Prosper, with deadbeat borrowers with mediocre credit, and they're large signature loans [CC consolidation] so the borrowers are more likely to hide.


I think Prosper would be better off with doing more random lawsuits right now... at the risk of a BK spike.

P-----r is completely different than CC companies or mortgage companies because IT'S NOT THEIR MONEY that they've loaned. Not a dime. This is the only credit type I can think of with this business structure. IOW, they have zero financial incentive to take anyone to court.

[ira01]

If there are JDBs offering ANYTHING P------r just needs to suck it up and take it.

Are you sure?  What if the JDB's offer 0.00001% (that would be 65 cents for the $6.5M portfolio) -- should Prosper take it?  If you say "no," then we are really just haggling over the price* that Prosper should accept, not whether there should be a minimum price.

*  This renminds me of the following old story that I also heard as attributed to Churchill:

There is a rather cynical and unkind story which I have heard variously attributed. I think when my mother first told it to me it was supposed to be about Winston Churchill. He was sitting at a dinner and talking to his dinner partner, when for some reason the question he asked seemed appropriate, although I can’t imagine how it could have been. He asked her if she would sell her body for £1 million, and she said yes, she thought she might. Then he asked if she would do it for £10. “What do you think I am?” she cried indignantly. “Madam,” he responded, “we have already established that. Now we are only haggling over the price.”

[Mtnchick]

If there are JDBs offering ANYTHING P------r just needs to suck it up and take it.

Are you sure?  What if the JDB's offer 0.00001% (that would be 65 cents for the $6.5M portfolio) -- should Prosper take it?  If you say "no," then we are really just haggling over the price* that Prosper should accept, not whether there should be a minimum price.

*  This renminds me of the following old story that I also heard as attributed to Churchill:

There is a rather cynical and unkind story which I have heard variously attributed. I think when my mother first told it to me it was supposed to be about Winston Churchill. He was sitting at a dinner and talking to his dinner partner, when for some reason the question he asked seemed appropriate, although I can’t imagine how it could have been. He asked her if she would sell her body for £1 million, and she said yes, she thought she might. Then he asked if she would do it for £10. “What do you think I am?” she cried indignantly. “Madam,” he responded, “we have already established that. Now we are only haggling over the price.”

Yep - that's exactly what I think. 3 cents or .00000003 cents really isn't going to change my life. I'm a lot more interested in P------r getting honest about their viability. These are dead loans. Period (yes, I know that one might come in and pay, and I might win the lottery tomorrow - but I'd be a fool to plan my life against either happening).

[Urbi_et_Orbi]

I wonder how many delinquent borrowers will be receiving stimulus checks - and spend it on ANYTHING but catching up their Prosper loans?

[snake]

If there are JDBs offering ANYTHING P------r just needs to suck it up and take it.

Are you sure?  What if the JDB's offer 0.00001% (that would be 65 cents for the $6.5M portfolio) -- should Prosper take it?  If you say "no," then we are really just haggling over the price* that Prosper should accept, not whether there should be a minimum price.

*  This renminds me of the following old story that I also heard as attributed to Churchill:

There is a rather cynical and unkind story which I have heard variously attributed. I think when my mother first told it to me it was supposed to be about Winston Churchill. He was sitting at a dinner and talking to his dinner partner, when for some reason the question he asked seemed appropriate, although I can’t imagine how it could have been. He asked her if she would sell her body for £1 million, and she said yes, she thought she might. Then he asked if she would do it for £10. “What do you think I am?” she cried indignantly. “Madam,” he responded, “we have already established that. Now we are only haggling over the price.”

I believe it was George Bernard Shaw

[ira01]

Debt Sale Update

05/2/08 posted by Doug Fuller

As most lenders’ know, Prosper had been planning to execute a debt sale during the month of April. To this end, a “bid file” was cut on April 11th. This bid file contained all loans that were more than 120 days past due as of that date that did not have a bankruptcy indicator or an open “Promise to Pay”.

While searching for something else, I came accross this post:

I think I read in the same place that the reason some loans were allowed to be strung out as much as they were is because Prosper didn't want to write them off if they thought there was a chance of collecting on them.

That was stated as a response to the first debt sale, and why some of them weren't sold.

But I found the comment in jwitchel's blog that I was thinking of

NewHorizon wrote: "Going forward, and if I understand the process correctly, some severely delinquent loans may be left out of a debt sale because of a promise-to-pay?"

Actually, the opposite. That is what got us into the 10-month situation. We will be taking a stricter view going forward.
http://prospers.org/blogs/jwitchel/2007/05/11/talking_about_the_debt_sale_process#c374

The link to Wichtel's blog no longer works, although I think someone here has it archived somewhere.  

Maybe Fuller and Wichtel need to have a chat?