piotrek04

1099-C Cancellation of Debt and Judgment

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Thanks for an example of some bad Ohio case law.  My situation is theoretical at this time.

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26 C.F.R. § 1.6050P-1(a)(1). 26 C.F.R. § 1.6050P-1(B)(2) sets forth eight identifiable events that can trigger the filing and issuance of a Form 1099-C, among which are "(A) [a] discharge of indebtedness under title 11 of the United States Code (bankruptcy)," and "(G) [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." 26 C.F.R. § 1.6050P-1(B)(2)(i) (West 2009).

 

If the identifiable event is (G), and creditor issues the 1099-C, they necessarily must have arrived at the decision to discontinue collection activity and discharge debt.

 

These cases are favorable to that position:

 

Franklin Credit Management Corp. v. Nicholas, 73 Conn. App. 830 (2002)

 

Amtrust Bank v. Fossett, 224 P. 3d 935 (Ariz. Ct. App. 2009)

 

Cadle Co. v. Neubauer, 562 F. 3d 369 (5th Cir. 2009)

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Nascar:  I gotta ask.  What circut were those case?  Civil court, or tax court?

 

I cited two state court cases and one federal district court of appeal as examples. There are many others. I recall reading an opinion a few years ago where the court opined that by filing a 1099-c the creditor was (for lack of a better term) "assigning" the debt to the federal government. 

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Same here, we need NASCAR to put it in laymens terms for us. I had read this awhile back, but never could get a clear understanding on it.

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The last I heard, the final decision on this was not yet resolved.  Some states courts rule one way...some the other.  Even Federal 9th Circut ruled differently than Federal 5th or 6th. 

 

An opinion letter from the FTC or IRS might carry some weight, but IMHO, its a toss up....

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This is what's included on a 1099-C form:

 

When Is a Debt Canceled


A debt is deemed canceled on the date an identifiable event occurs or, if earlier, the date of the actual discharge if you choose to file Form 1099-C for the year of cancellation.   An identifiable event is one of the following.

1.  A discharge in bankruptcy under Title 11 of the U.S. Code. For information on certain discharges in bankruptcy not required to be reported, see Exceptions, later. Enter “A” in Box 6 to report this identifiable event.

2.  A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal nonbankruptcy or state court proceeding. Enter “B” in Box 6 to report this identifiable event.

3.  A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration  of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired. Enter “C” in Box 6 to report this identifiable event.

4.  A cancellation or extinguishment when the creditor elects foreclosure remedies that by law extinguish or bar the creditor's right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised. Enter “D” in Box 6 to report this identifiable event.

5.  A cancellation or extinguishment making the debt unenforceable under a probate or similar proceeding. Enter “E” in Box 6 to report this identifiable event.

6. A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration. Enter “F” in Box 6 to report this identifiable event.

7.  A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. Enter “G” in Box 6 to report this identifiable event.

8.  The expiration of non-payment testing period. This applies only to entities described in numbers 1, 2, 3, or 4 under Who Must File, earlier. This event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31, plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law. Enter “H” in Box 6 to report this identifiable event.

The creditor can rebut the occurrence of this identifiable event if:

a. The creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31, or

b. Facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not canceled.  Significant bona fide collection activity does not include nominal or ministerial collection action, such as an automated mailing. Facts and circumstances indicating that a debt was not canceled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the creditor.

9.  Other actual discharge before identifiable event. Enter “I” in Box 6 if there is an other actual discharge before one of the identifiable events listed above.

 

 

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

 

 

Does a cancellation with a creditor mean the creditor can't sell the debt to a JDB? 

 

Once you receive a 1099-C, you have to claim the debt as income.  You then pay taxes on that income.  If a debt collector is still allowed to sue for that debt and wins, you not only owe the principal balance but will also owe any added fees etc.  So you will be paying the balance, added fees, possibly added interest, AND the taxes you already paid on the debt when it was included as income.  That, in my opinion, is an added argument as to why a debt collector (JDB) cannot sue for a debt that's been cancelled.

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Having gone through a 1099-C last year, I am familiar with that info, plus a lot more, as I had to get prepared for it. Learned a lot, plus the fact that their is no real decision between civil and tax court. I know how it reads, and what should be. But, the fact that they are now dumping 1099's from many years ago on us is disturbing, and the IRS is money hungry.

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As for my own opinion, I'm convinced that the issuance of a 1099-c "cancels," the debt, thus making it uncollectible. I realize there is some inconsistency among the courts but, having read a couple of the less favorable opinions, it appears that those opinions are simply the work of anti-consumer judges who will generally find some way, any way, to rule against the consumer and in favor of business. (Yes, Virginia, there are anti-consumer judges)

 

The well-reasoned opinions fall on the consumer side and explain that when a 1099-c is issued, a rebuttable presumption is created that the debt has been cancelled. (It says so right on the face of the document). Here's the catch: The issuing entity can, however, rebut the presumption by making a showing that the 1099-c was issued in error, BUT the burden is on the issuer to prove this. 

 

In any event, the legal presumption favors cancellation. Therefore, if you're a debt collector threatening to send me a 1099-c, my response is, "Great, I'll be watching for it in the mail."

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In my opinion, I think we wind up with a great big maybe.

 

There are certain "triggers" that absolutely do cancel the debt...a BK 7 for example.

 

There are others, like SOL defense in court, that probably depend on state law.

 

So...bottom line...if you get a 1099c, get IRS Pub 4681 and determinr for yourself whether you  want to pay taxes or take a chance with the IRS.

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I agree that a 1099-C cancels the debt and renders it uncollectible. 

 

 "Cancel" is defined as "[t]o destroy a written instrument by defacing or obliterating it," or "[t]o terminate a promise, obligation or right." BLACK'S LAW DICTIONARY 197 (7th ed.1999). "Cancellation" is defined as "[t]he act of defacing or obliterating a writing (as by marking lines across it), thereby rendering it void," or "[a]n annulment or termination of a promise or an obligation."

 

Is there a law that says a creditor who has cancelled a debt by issuing a 1099-C cannot then sell it?  I think that's part of the problem.  We know a debt collector (JDB) is going to argue that the debt was cancelled with the previous creditor but they (JDB) didn't cancel it.

 

This is from the IRS website:

 

In general, if you are liable for a debt that is canceled, forgiven, or discharged, you will receive a Form 1099-C (PDF), Cancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, then the debt has not been cancelled and you do not have taxable cancellation of debt income.

 

http://www.irs.gov/taxtopics/tc431.html

 

You notice that canceled and forgiven are separate.  What is the difference between the two terms?

 

Like I said, it doesn't make sense that you claim the cancelled debt as income, pay taxes on it, and then can be ordered to pay the full amount and more if a debt collector sues and wins.

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Like I said, it doesn't make sense that you claim the cancelled debt as income, pay taxes on it, and then can be ordered to pay the full amount and more if a debt collector sues and wins.

I do not remember enough about the post to find it again...and it was a few years ago...but...

 

There was a poster who got as 1099c for a debt the OC has not tried to collect in 3 yrs (one of the "triggers") but then suddendly decided to offer a settlement.  Because the poster was trying to buy a house and needed the collection cleared, he paid...then had to refile his tax return to get some of his taxes back.

 

It doesn't make sense...but...

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I do not remember enough about the post to find it again...and it was a few years ago...but...

 

There was a poster who got as 1099c for a debt the OC has not tried to collect in 3 yrs (one of the "triggers") but then suddendly decided to offer a settlement.  Because the poster was trying to buy a house and needed the collection cleared, he paid...then had to refile his tax return to get some of his taxes back.

 

It doesn't make sense...but...

 

Yeah, there always seems to a "but". 

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So annoying, as IRS usually is.  Of course they would figure a way to further screw you over.   I hope the amt of "found" is the balance minus all the interest charges.  Sure as hell won't let you write interest off on charge cards.  

Gee and the attorney fees should be "lost" income. 

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I am running into the same problem. Judgement from FIA card services and they sent a 1099c two years ago. I filed it with out taxes thinking good this debt is done. Nope judgement still on report. So now trying to clean all that report up, should I first dispute the debt then have them verify? Once verified send those documents showing that a certaing amount was written off and they can not collect the same debt twice blah blah etc....?

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It was explained to me that judgments are a matter of public record and the CRA's pick it up from there and report it for 7 years before it falls off.

It was also mentioned that even if the judgment is satisfied (paid) it is still on your report but marked satisfied.

I don't think that paying taxes, or not, is going to make the debt go away.

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 judgments are a matter of public record and the CRA's pick it up from there and report it for 7 years before it falls off.

 

As an IT Consultant, I did a project for a "Public Record Skimmer" (for lack of a better term) that scanned public records and sold the info they found to the CRAs.  So...the CRAs themselves never look at the actual court records.  Nowdays, its automated, but I'm still pretty sure there are companies (like ADP) that do the actual skimming.

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Interesting ......... from what sources are these records skimmed ........ besides court records that is?

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Now just about every county in the nation put together a web page..so the data furnishers who have automated go there, but for thos places that don't have web sites, there are companies that employ people to go to the court house and transcribe the data.  Sometimes, they just pull it from the local newspaper.

 

The ultimate source is the courthouse...but the method of collecting it and selling it to the CRAs varies.

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My understanding is that they can issue an updated version to reflect a zero bal. or correct the one issued.

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