The IRS requires any entity discharging a debt to file an “information return” on a Form 1099-C with the IRS. See Treas. Reg. § 1.6050P-1(a). Debt collectors or creditors will sometimes mail a form 1099-C to a consumer when debt is settled, discharged, or is no longer collectable. The most relevant requirements for our typical clients are the following two:
A) a discharge of indebtedness pursuant to an agreement between an applicable entity and a debtor to discharge indebtedness at less than full consideration; and B) a discharge of indebtedness pursuant to a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt.
If you receive a 1099-C from a debt collector or a creditor, you should not ignore it, you should take it to a professional tax preparer and seek its advice how to handle the 1099-C.
The purpose of this article is to address how a debt collector or creditor should report a debt that it has issued a 1099-C. It is our opinion that the Fair Credit Reporting Act and Fair Debt Collection Practices Act prohibit creditors from reporting and collecting debt that has been settled, discharged, or is no longer collectable. When a creditor issues a 1099-C it is reporting that the debt is no longer collectable. It stands to reason, therefore, that creditors may not make credit reports or collect debt after that debt is reported on a form 1099-C. When a 1099-C is issued, it is an admission by the debt collector or creditor within the Form 1099-C plausibly indicates discharge even if the mere filing of the form does not.
Yet such reporting and collection efforts continue to happen. A federal court has ruled that such conduct is potentially prohibited. In Baker v. American Financial Services, the Court held that consumers may bring claims under the Fair Credit Reporting Act if creditors continue to report debts on credit reports after filing a Form 1099-C if the form provides that debt has been discharged. Baker opened an account with AmeriCredit Financial Services for the purpose of purchasing an automobile. In 2013, Baker surrendered the vehicle to AmeriCredit Financial
Services after defaulting on her debt with them. In 2015, Baker alleges AmeriCredit Financial Services forgave the deficiency owed to them, and she received an Internal Revenue Service (“IRS”) Form 1099-C informing her of the forgiveness of the amount owed. In May 2015, Baker discovered a notice of a deficiency on her credit report and filed disputes with Defendants, who are credit reporting agencies. Baker alleges AmeriCredit Financial Services failed to investigate Baker’s claim in violation of the FCRA.
If you receive a Form 1099-C for discharged debt, be sure to check your credit report within thirty days. If your creditor continues to report your discharged debt, call us to determine whether we can help you. Typically, we would ask to see a copy of the 1099-C and a copy of the credit report. We offer a free consultation on all FCRA claims and we can be reached at 412-823-8003.