April 14, 2012

Debt Collection after a 1099-C

First of all I want to say you have an excellent and very informative web site.  I have a question that I think will stump you. 

Let’s assume I have a credit card with a credit card company.  Let’s also assume that I quit paying on this account and the credit card company reports that loss on their taxes as most businesses do.

If a business would write that account off and the credit was given by the IRS on the proper form then in my opinion there is no debt anymore.  If anybody owns it the government does.

My question is this.  If the credit card company writes it off as a loss how can they turn around and sell that account to a Junk Debt Buyer?  Just to make this more interesting I will ask a second question.  If the account was written off how can the Junk Debt Buyer purchase anything that really no longer exists? 

I personally don’t know of any company after a debt has been written off that will even attempt to collect it at a future date.

It just appears to me that the credit card company is trying to have it both ways.  First claiming the loss on taxes.  And secondly then turning around and selling something they really don’t have the right to sell. 

Can I please take my star now or must I continue to try and Stump The Experts.

Thanks again for a really great web site.



Hello Robert,

Well, some case law would have been nice.  Now, don’t get me wrong I do appreciate your question.  It’s just that somehow I have a vision of this fellow.  Ok, so maybe that’s not you, but he is singing the same song and along those lines, here’s something that is interesting from the Code of Federal Regulations (emphasis added):

31 CFR § 903.5  Discharge of indebtedness; reporting requirements.

(a) Before discharging a delinquent debt (also referred to as a close out of the debt), agencies shall take all appropriate steps to collect the debt in accordance with 31 U.S.C. 3711(g), including, as applicable, administrative offset, tax refund offset, Federal salary offset, referral to Treasury, Treasury-designated debt collection centers or private collection contractors, credit bureau reporting, wage garnishment, litigation, and foreclosure. Discharge of indebtedness is distinct from termination or suspension of collection activity under part 903 of this title and is governed by the Internal Revenue Code. When collection action on a debt is suspended or terminated, the debt remains delinquent and further collection action may be pursued at a later date in accordance with the standards set forth in this chapter. When an agency discharges a debt in full or in part, further collection action is prohibited. Therefore, agencies should make the determination that collection action is no longer warranted before discharging a debt. Before discharging a debt, agencies must terminate debt collection action.

(b) Section 3711(i), title 31, United States Code, requires agencies to sell a delinquent nontax debt upon termination of collection action if the Secretary determines such a sale is in the best interests of the United States. Since the discharge of a debt precludes any further collection action (including the sale of a delinquent debt), agencies may not discharge a debt until the requirements of 31 U.S.C. 3711(i) have been met.

(c) Upon discharge of an indebtedness, agencies must report the discharge to the IRS in accordance with the requirements of 26 U.S.C. 6050P and 26 CFR 1.6050P–1. An agency may request Treasury or Treasury-designated debt collection centers to file such a discharge report to the IRS on the agency’s behalf.

(d) When discharging a debt, agencies must request that litigation counsel release any liens of record securing the debt.

So there seems to be some truth to the “write that account off and the credit was given by the IRS on the proper form then in my opinion there is no debt anymore”.  The only problem is that the above regulations are standards for “Federal agencies” which includes “agencies of the executive, legislative, and judicial branches of the Government, including Government corporations”.

Now, do we have any case law regarding continued collection after issuance of form 1099-C?  Interestingly, we do.  In DEBT BUYERS’ ASSOCIATION v. SNOW [Civil Action No. 06-101 (CKK) January 30, 2006] a collection agency trade group argued that “submitting 1099-C Forms will disinvest them of the ‘right’ to continue to pursue collection activities”.  The JDB’s Club was even able to dig up some case law “In re Crosby, 261 B.R. 470 (Bankr. Ct. D. Ka. 2001), Plaintiff states that ‘case law suggests that courts are willing to find debt, including judgment debts, unenforceable if the creditor (here, a Debt Buyer), has issued to the debtor a Form 1099-C reporting discharge of the indebtedness income.’”


You get the funny feeling that something’s not right when the JDB’s Club is arguing on your side (i.e. that the 1099-C cancels the collector’s right to collect).


The Court concludes (emphasis added):

 “Plaintiff insists that issuance of 1099-C Forms will prohibit Debt Buyers from pursuing debt collection and enforcement activities after such forms are issued, which may be before a state’s statute of limitations for the collection of such debts has expired.  However, as stated above, there is no reason that a Debt Buyer cannot include with its statement to an affected debtor an instructional guideline explaining the reasons for the issuance of the 1099-C (for example, because 36 months have transpired without debt collection activity), a disclaimer that a 1099-C must be issued as a result of an identifiable event regardless of whether an actual discharge of indebtedness has occurred on or before the date of such an event, and a notice to the debtor that a Debt Buyer plans to continue debt collection activities….Plaintiff can only cite one case, notably from a bankruptcy court in Kansas, in which the prior issuance (without any disclaimer) of a Form 1099-C rendered a debt effectively discharged and unenforceable….this Court does not find persuasive the evidence presented by Plaintiff regarding the limitations Treas. Reg. § 1.6050P-2(e) would place on Debt Buyers’ ability to collect debts in accord with state statute of limitations”.

Robert, from a practical standpoint [such as in the forgiveness of debt from a short sale], the creditor’s issuance of a 1099-C will equate with the waiving of any future collection, although that does not necessarily seem to be the case legally. 

Thanks for the questions and no star for you today my friend. 


This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.


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