When account owners have an account that reflects a negative balance, the lender is faced with a myriad of options and obligations with regard to the pursuit of that debt. The first consideration that lenders (banks and credit unions alike) often face is when, and if, to conclude that the account owner does not intend to, or is not able to, clear the negative balance or loan deficiency. When a lender declares an account charged off, the account has become so delinquent that it is considered to be a loss, and it is written off the creditor’s books for regulatory or taxation purposes. Once that conclusion is made certain regulatory filings are required to document the charge-off depicting a high probability of loss. Generally, if debtors owe a debt to a lender, and the lender cancels or forgives that debt for less than its full amount, the debtor is treated for income tax purposes as having income and may have to pay tax on this income by virtue of a 1099-C filing from the lender. At the same time, however, the account owner/debtor is still responsible for the balance, and the lender/creditor can still make an effort to collect what is owed, with obvious exceptions being discharged or dischargeable bankruptcy filings. If a bank or credit union charges off an uncollectable debt, the lender will likely issue a 1099-C tax form to the debtor and receive a corresponding tax deduction for the uncollectable amount. This blog post examines whether a lender is permitted to pursue debt collection even though the debt has been charged off and a 1099-C has been issued to the defaulted borrower.
“Charging Off” Uncollectable Debt
“Charging off” a debt refers to a mechanism whereby banks, credit unions, or other creditors determine that a debt is unlikely to be repaid by the borrower and, therefore, cannot be collected. As a result, a loan that is charged off is written off and deemed a loss of principal and interest. However, Florida courts have held that charged off debt is not forgiven, as may still be pursued for debt recovery and satisfaction. See Caplinger v. Ocwen Loan Servicing, LLC, 8:14-CV-3214-T-35MAP, 2015 WL 12938920, at *1 (M.D. Fla. Dec. 29, 2015).
1099-C Issuance
In its broadest sense, a 1099-C is an information tax return that banks, credit unions and other commercial lenders must provide debtors after an identifiable event causes the creditor to have to discharge an indebtedness of at least $600. The identifiable events that require a creditor to issue a 1099-C include any discharge, cancellation or extinguishmentof a debt that occurs by reason of (A) bankruptcy; (B) receivership, foreclosure, or similar proceeding; (C) the expiration of the statute of limitations for collection of the debt; (D) the election of foreclosure remedies by a creditor; (E) pursuant to a probate or similar proceeding; (F) a settlement for less than the full amount owed; or (G) the application of a defined policy of the creditor, to discontinue collection activity and discharge debt. See Tres. Reg. § 1.6050P-1(b)(2)(i).
Lenders that charge off a debt trigger issuance of the 1099-C when their defined policy leads the lender to discontinue collection activity and discharge a debt. A lender’s defined policy includes both written policies and established business practices. See Tres. Reg. § 1.6050P-1(b)(2)(iii). An example of an established business practice includes discontinuing collection activity and abandoning debts upon expiration of a particular non-payment period. Id.
Collecting Debts After 1099-C Issuance
The interplay between collections law and tax law has created uncertainty for lenders seeking to continue collection efforts following the issuance of a 1099-C. The tax code and accompanying Treasury Regulations consider the occurrence of any of the identifiable events described in Tres. Reg. § 1.6050P-1(b)(2)(i) a discharge of indebtedness for tax purposes, which creates income for the debtor and a corresponding income deduction for the lender. The very purpose of the 1099-C is to provide debtors the information they need to determine the amount of taxable income that needs to be reported. However, debts that are considered uncollectable for federal tax purposes often remain collectable under applicable federal and state collections law as the contract rights are likely not extinguished. The conflict between collections law and tax law has required courts to consider whether the issuance of a 1099-C renders a charged off debt unenforceable, and subsequently created a circuit split amongst courts.
A majority of courts have held that the issuance of a 1099-C does not automatically discharge a debt or prohibit future collection activities. For example, in Ware v. Bank of Am., a United States District Court in the 11th Circuit analyzed the issue of whether a creditor’s issuance of a 1099-C extinguishes or cancels a debt. The court acknowledged the issue was of apparent first impression in the 11th Circuit, and ultimately concluded that a creditor’s issuance of a 1099-C does not legally extinguish or cancel a debt. Ware v. Bank of Am. Corp., 9 F. Supp. 3d 1329, 1340–41 (N.D. Ga. 2014). The court considered an information letter from the Internal Revenue Service dated December 30, 2005, where the IRS explained: “The Internal Revenue Service does not view a Form 1099–C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.”SeeIRS Info. 2005–0207, 2005 WL 3561135 (Dec. 30, 2005). The court also cited numerous courts in other jurisdictions that have followed the IRS letter’s reasoning and concluded that a Form 1099–C does not legally extinguish or cancel a debt. See, e.g., Fed. Deposit Ins. Corp. v. Cashion, No. 1:11–cv–72, 2012 WL 1098619, at *7 (W.D.N.C. Apr. 2, 2012) (stating that “a Form 1099–C does not itself operate to legally discharge a debtor’s liability.”); In re Zilka, 407 B.R. 684, 689 (Bankr.W.D.Pa.2009) (holding that Forms 1099–C, as a matter of law, do not themselves operate to legally discharge debtors from liability on those claims that are described in such Forms 1099–C); Leonard v. Old Nat’l Bank Corp., 837 N.E.2d 543, 545–46 (Ind.Ct.App.2005) (filing a Form 1099–C is merely an informational filing with the IRS, and does not operate to cancel debt itself); Atchison v. Hiway Fed. Credit Union, 2013 U.S. Dist. LEXIS 38532, *8 (D. Minn. 2013) (After attempting to collect from the defaulted borrower plaintiff for over two years, the defendant credit union charged off the account as inactive and filed a 1099-C with the IRS. After a defaulted borrower had a mortgage loan denied due to credit reporting from the credit union, the defaulted borrower sued alleging violations of FDCPA by misstating the status of his debt and FCRA by inaccurately reporting to a CRA that his debt remains unpaid and outstanding. The court rejected the former borrower’s claims and found that “the Internal Revenue Service does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection” and therefore “the issuance of a Form 1099-C does not, alone, operate to extinguish a debt.”)
Florida courts have joined Ware in holding that the issuance of a 1099-C does not legally extinguish or cancel a debt. In Shaffer v. Servis One, a United States District Court in Florida noted that both Ware and an Internal Revenue Service opinion suggest that a 1099-C does not by itself extinguish debt or even preclude a creditor from pursuing collection. Rather, the filing of a 1099-C and its delivery to the borrower are required when a lender writes off a debt as a loss for accounting purposes. Shaffer v. Servis One, Inc., 347 F. Supp. 3d 1039, 1047 (M.D. Fla. 2018). Similarly, a Florida Bankruptcy District Court held that a lender did not waive its right to repayment when it issued a 1099-C after it charged-off a debt. In re Petty, 3:19-AP-0060-JAF, 2021 WL 1235369, at *3 (Bankr. M.D. Fla. Mar. 31, 2021).
However, a minority of courts have gone the other way and held that the issuance of a 1099-C serves to discharge a debt. In re Reed established the minority position when a Tennessee Bankruptcy Court considered the IRS Information Letter cited in Ware and disagreed with the IRS. In re Reed, 492 B.R. 261, 271–72 (Bankr. E.D. Tenn. 2013). Instead, the court believed that cancellation of debt income is not required to be reported to the Internal Revenue Service unless one of the express “identifiable events” occurs, so it seems to follow that if a financial institution has filed a Form 1099–C with the Internal Revenue Service, cancellation or discharge of a debt has, in fact, occurred. Still, it appears the court discharged the creditor’s debt primarily because the court considered it to be inequitable to require a debtor to claim cancellation of debt income as gross income while still allowing the creditor to then collect it from the debtor. Similarly, an Iowa Bankruptcy Court followed In re Reed and concluded that the issuance of a 1099–C, when coupled with payment of income tax, canceled an otherwise collectable debt. In re Lukaszka, BR 17-00242, 2017 WL 3381815, at *3 (Bankr. N.D. Iowa Aug. 4, 2017). In following In re Reed, the court similarly noted “that it would be inequitable to find otherwise.” Id.
Conclusion
Banks and credit unions that understand their legal rights following the issuance of a 1099-C can likely continue collection efforts to recover debts that have been previously written off. Although the issuance of a 1099-C may render uncollectable debts discharged for tax purposes, Florida courts have followed the majority in holding that the debt remains collectable. However, banks and credit unions must proceed with caution in light of the current circuit split, as courts in a few states have found that the issuance of a 1099-C actually discharges a debt. Banks and credit unions are urged to retain local counsel to assess how the issuance of a 1099-C and the facts and circ*mstances of the particular matter may affect collection rights in their state.
FAQs
Banks and credit unions that understand their legal rights following the issuance of a 1099-C can likely continue collection efforts to recover debts that have been previously written off.
Can a debt be collected after charge-off? ›
Once an account has been charged off, the lender may sell it to a collection agency, either immediately or at a later date. At the time the account is charged off, the creditor usually stops the clock on interest charges, but the collection agency may add fees of its own.
What is the statute of limitations on a 1099-C cancellation of debt? ›
Although there is a statute of limitations on old debt, there's no statute of limitations on 1099-C forms—which means that lenders and debt collectors occasionally send out 1099-C forms on very old debts. If you receive a 1099-C on an old debt, your best option is to contact a CPA or tax professional.
When a debt is Cancelled with a 1099-C does it taken off your credit report? ›
This information can remain on your credit report for up to seven years. If you are able to get your debt completely canceled, you then no longer have any responsibility for the amount owed. But the creditor must report the canceled amount or settled debt to the IRS using the Form 1099-C cancellation of debt.
When agreeing to forgive mortgage debt the lender will submit a 1099-C to their client and the IRS? ›
Form 1099-C is a federal tax form required by the IRS. Lenders and other creditors must submit a copy to the agency and to taxpayers whenever they cancel or forgive a debt worth $600 or more.
Can a creditor still collect after issuing a 1099-C? ›
Lenders that charge off a debt trigger issuance of the 1099-C when their defined policy leads the lender to discontinue collection activity and discharge a debt. A lender's defined policy includes both written policies and established business practices.
Can a collection agency file a 1099-C? ›
However, in 2016, an IRS rule allowed debt collectors to file a 1099-C after 36 months of no payment. In this event, the account is still delinquent, but the debt hasn't been forgiven, so the lender may still try to collect.
What do I do with a 1099-C cancellation of debt? ›
In most situations, if you receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt, you'll have to report the amount of cancelled debt on your tax return as taxable income.
What is 1099-C decision or policy to discontinue collection? ›
For example, Code G on Form 1099-C is for the “Decision or policy to discontinue collection.” According to IRS Publication 4681, “Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt.
How do I fight 1099-C? ›
If you believe the information on the form is wrong, contact the lender to correct it. If the payer (lender) won't correct the IRS Form 1099-C document, report the amount on your tax return but include an explanation as to why the payer's information is incorrect.
The creditor must file a 1099-C the year following the calendar year when a qualifying event occurs. That just means the creditor must file the next year if they discharge or forgive a debt.
What happens if I don't report 1099-C? ›
Even if you do not receive a 1099-C, you are still responsible for reporting canceled debt as taxable income on your federal tax returns. If you fail to report a discharge of indebtedness, you will likely hear from the Internal Revenue Service for your failure to pay.
What are the exceptions to the 1099c? ›
You might be able to exclude the cancellation of debt income if one of these applies: You're insolvent. The debt was discharged in bankruptcy. The debt was qualified main home indebtedness (applies through 2025).
Does 1099 qualify for loan forgiveness? ›
However, if your employer provides you with an IRS form 1099 (instead of a W-2), you are considered a 'contract employee' and would not be eligible for PSLF.
Who is ultimately responsible for filing a 1099 s after closing? ›
According to the IRS, the person who must file the Form 1099-S reporting the sale is the person responsible for closing the transaction. This means that if you used a title company or attorney to close your transaction they are generally responsible for completing and filing the form on your behalf.
Do mortgage lenders look at 1099? ›
A 1099 income loan is for self-employed or independent contract workers who have difficulty qualifying for a conventional mortgage loan. Lenders look at income from a 1099 instead of tax returns.
Do creditors always file a 1099 C? ›
Generally, a creditor must file a Form 1099-C if: (1) debt in the amount of $600 or more has been discharged; (2) the creditor is an applicable entity; and (3) an identifiable event has occurred.
How do I remove a charge-off without paying? ›
Having an account charged off does not relieve you of the obligation to repay the debt associated with it. You may be able to remove the charge-off by disputing it or negotiating a settlement with your creditor or a debt collector. Your credit score can also steadily be rebuilt by paying other bills on time.
Do I have to pay a charged off debt? ›
While a charge-off means that your creditor has reported your debt as a loss, it doesn't mean you're off the hook. You should pay charged-off accounts as well as you can. "The debt is still the consumer's legal responsibility, even if the creditor has stopped trying to collect on it directly," says Tayne.
Can a bank sue you after a charge-off? ›
Yes, you can be sued for a debt that has been charged off.
The term “charge off” means that the original creditor has given up on being repaid according to the loan's original terms.
Know the Different Copies of a 1099 Form
Copy 2—Goes to the recipient. Copy B—Goes to the recipient. Copy C—Stays with employer for record keeping.
Should I pay a charge-off in full or settle? ›
Should I pay off charged-off accounts? You should pay off charged-off accounts because you are still legally responsible for them. You will still be responsible for paying off charged-off accounts until you have paid them, settled them with the lender, or discharged them through bankruptcy.
Does the IRS really have a fresh start program? ›
The Fresh Start program is open to any taxpayer who owes taxes and is struggling to pay them. There are no income requirements. The first step in applying for the IRS Fresh Start program is to contact your tax attorneys or accountants and see if you qualify.
Do credit card companies ever forgive debts? ›
Credit cards are another example of a type of debt that generally doesn't have forgiveness options. Credit card debt forgiveness is unlikely as credit card issuers tend to expect you to repay the money you borrow, and if you don't repay that money, your debt can end up in collections.
What is the tax rate on a 1099c? ›
Paying taxes as a 1099 worker
As a 1099 earner, you'll have to deal with self-employment tax, which is basically just how you pay FICA taxes. The combined tax rate is 15.3%.
What is Form 1099 C cancellation of debt insolvency? ›
If you don't pay off the credit or loan, and the creditor cancels the debt, you may receive a 1099-C from the creditor. The "C" in this form stands for cancellation of debt. The IRS categorizes the credit you originally received as income.
When can a taxpayer exclude all income from their cancelled debt? ›
Discharged debt is excluded from gross income if the discharge occurs when the taxpayer is insolvent. For purposes of the exclusion, insolvency is defined as the amount in which the taxpayer's liabilities exceed the taxpayer's assets. The amount excluded by an insolvent taxpayer is limited to the amount of insolvency.
How do I correct a 1099 to zero? ›
1099s Sent By Mistake
If you discover you sent a 1099-MISC form by mistake, void it using a corrected form. Place an "X" in the "Corrected" box at the top of a regular 1099-MISC form, fill out the payer and recipient information exactly as you did on the original form, and then enter zeros for all of the money amounts.
How long can a company keep you on 1099? ›
While duration is only one factor among many that determines whether a worker is a contractor or an employee, six months is usually recommended as a safe duration and one-year should usually be considered an outside limit, assuming that the other independent contractor criteria are met.
Will I get in trouble for not filing a 1099? ›
The penalty for not filing a 1099 is $250 per form not filed. We've answered a few questions to help you be more prepared. Q: Who has to file a 1099? A: The IRS requires every business (including landlords) who pays $600 or more to an unincorporated entity to issue and file Form 1099 to their payees.
To be eligible for student loan debt cancellation, borrowers must have a 2020 or 2021 tax year income of less than $125,000 for individuals and less than $250,000 for married couples or heads of household.
Is cancellation of debt good or bad? ›
Unless debt cancellation comes in the form of bankruptcy or debt settlement, cancellation of debt doesn't always impact your credit score. However, debt cancellation may not be all good news for you. In some cases, you may have to pay taxes on canceled debt, as the government may consider it taxable income.
What is the IRS forgiveness program 2023? ›
What is the IRS Forgiveness Program? 2023 Updates. Certain taxpayers in the United States who cannot afford to pay their tax liability due to financial hardship may qualify for tax debt relief under the IRS Forgiveness Program.
What happens if a company refuses to correct a 1099? ›
If the issuer of an erroneous 1099 refuses to correct its mistake, you'll need to include an explanation on your tax return and attach documentation in support of your assertion.
Who is responsible for completing the closing disclosure? ›
The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the.
Why does a form 1099s have to be filed after closing? ›
Closing agents are required by the IRS to submit Form 1099-S to report the sale or exchange of real estate. The IRS will examine this document to determine if the seller owes real estate taxes on any gains from the sale.
Do mortgage lenders verify tax returns with IRS? ›
Yes, mortgage companies and underwriters verify your tax returns with the IRS. The lenders will request the tax transcript directly from the IRS to ensure that your application is not fraudulent.
Is it harder to buy a house with a 1099? ›
Home buyers who earn 1099 income often find it difficult to qualify for a mortgage. The FHA guidelines for 1099 income are clear in that you are able to qualify if you can meet the criteria and provide the necessary documentation.
Do mortgage lenders verify income with IRS? ›
The Income Verification Express Service (IVES) program is used by mortgage lenders and others within the financial community to confirm the income of a borrower during the processing of a loan application.
Should you pay a debt that has been charged off? ›
Should I pay off charged-off accounts? You should pay off charged-off accounts because you are still legally responsible for them. You will still be responsible for paying off charged-off accounts until you have paid them, settled them with the lender, or discharged them through bankruptcy.
What If You Don't Pay Your Charge-Off? If you choose not to pay the charge-off, it will continue to be listed as an outstanding debt on your credit report. As long as the charge-off remains unpaid, you may have trouble getting approved for credit cards, loans, and other credit-based services (like an apartment.
How long before a debt becomes uncollectible? ›
The statute of limitations on debt in California is four years, as stated in the state's Code of Civil Procedure § 337, with the clock starting to tick as soon as you miss a payment.
Can a debt collector sue you after a charge-off? ›
Yes, you can be sued for a debt that has been charged off.
The term “charge off” means that the original creditor has given up on being repaid according to the loan's original terms.
Is it better to settle a charge-off or pay in full? ›
It's better to pay off a debt in full (if you can) than settle. Summary: Ultimately, it's better to pay off a debt in full than settle. This will look better on your credit report and help you avoid a lawsuit. If you can't afford to pay off your debt fully, debt settlement is still a good option.
Can a creditor charge interest on a charged off account? ›
A creditor will usually “charge off” a debt when a consumer fails to make monthly payments for six consecutive months, at which point the account is closed to future charges, although the consumer still owes the debt. Many creditors will not collect interest on a charged off debt even if they have the right to do so.
What is the 609 loophole? ›
A 609 Dispute Letter is often billed as a credit repair secret or legal loophole that forces the credit reporting agencies to remove certain negative information from your credit reports.
How do I write a goodwill letter to remove charge-off? ›
I truly believe that it doesn't reflect my creditworthiness and commitment to repaying my debts. It would help me immensely if you could give me a second chance and make a goodwill adjustment to remove the late [payment/payments] on [date/dates]. Thank you for your consideration, and I hope you'll approve my request.
Can you dispute a charge-off? ›
If there is an incorrect charge-off on your credit report, you'll need to contact the credit bureau directly—and you'll need to do so in writing. You can send them a “dispute” letter that outlines who you are, what information you would like to have removed, and why the information in question is incorrect.
Can I negotiate a charge-off? ›
If the charge-off is correct, you can sometimes negotiate a repayment plan. It's rare to have a legitimate charge-off removed from your credit report, but it's possible to request that during negotiations, says Ulzheimer.
Do charge-offs go away after 7 years? ›
Like other negative items and reporting, a charge-off can stay on your credit reports for up to seven years from the date of the first missed payment.
You may be able to reopen a closed credit card account, but it will depend on why your account was closed and your issuer's policies. There's no guarantee the issuer will reopen your account, especially if they closed it due to missed payments or other problems.
What is the 11 word phrase to stop debt collectors? ›
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
Does disputing a debt restart the clock? ›
Does disputing a debt restart the clock? Disputing the debt doesn't restart the clock unless you admit that the debt is yours. You can get a validation letter in an effort to dispute the debt to prove that the debt is either not yours or is time-barred.
Can a creditor continue to report delinquency to a charged off account? ›
In most cases, a creditor can report a negative item for up to seven years from your first delinquency, even if the item was previously removed. So, many people find that their credit score increases significantly at first, only to fall again as the accounts reappear.
