Going by a Bloomberg article, the City of Detroit has not learned about debt collectors that are adopting new technologies to target borrowers. Like cities in New York State, Michigan authorizes its municipalities to collect income taxes from its residents. Detroit concluded its chapter 9 bankruptcy in late 2014, and in the meantime nearly half of its eligible residents chose not to submit their income tax returns for the 2014 tax year. The total lost revenue isn’t clear, but even full compliance probably wouldn’t compare to the city’s property-tax income.
One would think that a city in Detroit’s position wouldn’t expend much energy determining the best approach for enforcing tax compliance, but in fact it hired an economics graduate student to devise the best method of dealing with widespread tax noncompliance. The results explain why the debt-collection industry’s practices are so notorious: Sending threatening letters to debtors motivates them more than other incentives.
Detroit chose 7,000 random taxpayers owing at least $350 for 2014, but it sent three types of letters demanding payment. One was an appeal to taxpayers’ civic pride, noting that Detroit is returning from bankruptcy. The second letter was a bare statement of the taxpayer’s federal income for 2014, along with the tax percentages and exemptions that exist under Detroit law. The third letter took the harshest route: It told recipients that if they didn’t pay, they could be charged with a misdemeanor with a $500 penalty or 90 days in jail.
The threat worked best: three times more recipients filed a return than those who received the second letter. By contrast the civic-pride letter only garnered an additional 0.8 percent of respondents. Naturally, Detroit has embraced the threatening letters and has also backed them up with high-profile arrests. The results are modestly encouraging, and non-residents who owe city income taxes are more likely to file than before.
Municipalities obviously have a wider range of options for dealing with their debtors than debt collectors do, especially arresting people for nonpayment. The lesson, though, for those who pay attention to debt-collection practices is clear, sticks work better than carrots. It’s no wonder then that debt collectors push the envelope so often.
Put differently, maybe someday Detroit will adopt new technologies and start emailing taxpayers with cartoon characters that will walk them through their payments, but that day might still be a long time off.
The Bloomberg article is here, and the academic paper that resulted from it is here.
If debt collectors are hounding you, or if you owe significant tax debts, then discussing your situation with an experienced New York bankruptcy lawyer can help you strategize the best course of action. Bankruptcy can discharge old debts and under some circumstances even tax debts too.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
