Jansol

Creditor Charge-off and Judgement

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B of A charged-off and closed my acct. A little over a year later, B of A contracted attorneys  filed suit and was awarded judgement. Can the same creditor have a charge-off and judgement against you for the same account? I reside in TX. Both the charge-off and judgement is reflected on my credit report. 

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50 minutes ago, Jansol said:

Can the same creditor have a charge-off and judgement against you for the same account? I reside in TX.

Yes.   Charging off the account does not prevent them from attempting to collect the charged-off balance.

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Charge off is simply an accounting term used so that they can tell the tax authorities that the account is no longer a performing asset. They certainly can still try to collect on the account and/or obtain a judgement even after charge off. The debt is still owed.

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Thank you both for replying. I have another question: If creditors can charge-off accts wouldn't that be double-dipping, somewhat? Charge-off accts are considered write-offs and they get tax  credits for those accts while they pursue more aggressive approaches in effort to collect the debt. If they do collect the debt, then they have received money from both the government and the consumer.

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10 hours ago, BV80 said:

Yes.   Charging off the account does not prevent them from attempting to collect the charged-off balance.

I have my own opinion on this but, to be sure, it is not consistent with the majority. I am not a tax guy, so maybe I just don't get it. In the case of the tax implications of a cancelled debt that has subsequently been reduced to a judgment, does anyone know whether there is a mechanism in the tax code that exempts payments made in satisfaction of a judgment when the debt has earlier been cancelled and the taxpayer has already paid tax on the debt once?

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2 hours ago, Jansol said:

If creditors can charge-off accts wouldn't that be double-dipping, somewhat?

No.  Once they charge it off to bad debt they can issue you a 1099-C so that you now have to claim the debt on your taxes and then they cease collection.  Or they can continue collections without the 1099-C and IF they actually collect then it becomes an asset to them again and they have to declare it on their taxes as income.  

2 hours ago, Jansol said:

If they do collect the debt, then they have received money from both the government and the consumer.

Not exactly and tax law is completely separate from other areas and isn't "double dipping."  

When consumers pay what they owe to creditors that money becomes income which they declare and pay taxes on.  For the 6 months that the debt is listed as an asset to the company until charge off they are paying taxes on their assets as a whole not based on each individual account.  So for 6 months they pay taxes while not collecting.  They get a much smaller write off depending on their whole tax picture and how much bad debt they have to write off each quarter.  If they manage to collect after charge off (which is not often) then it becomes income again which has to be declared and taxes paid.  

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Just now, nascar said:

In the case of the tax implications of a cancelled debt that has subsequently been reduced to a judgment, does anyone know whether there is a mechanism in the tax code that exempts payments made in satisfaction of a judgment when the debt has earlier been cancelled and the taxpayer has already paid tax on the debt once?

See my answer above but if the company does not issue the 1099-c they can continue collection efforts including getting a judgment.  It is only if they do issue the 1099-c and the consumer has to declare it on their taxes that they must cease collection efforts.  

What I think is patently wrong is when an original creditor charges off the account then sells it but never issues a 1099-c because they sold the debt so that the buyer can continue collection efforts.  Then if defeated in court or they let the SOL for suit lapse a bottom feeder like PRA or Midland issues a 1099-C YEARS later for the entire amount when they paid pennies on the dollar.  The junk debt buyer should not be able to issue a 1099-c for more than they paid for the debt but tax law has not yet caught up to that.

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1 minute ago, Clydesmom said:

Once they charge it off to bad debt they can issue you a 1099-C so that you now have to claim the debt on your taxes and then they cease collection.

That is the issue. Courts generally hold that the issuance of a 1099C does not extinguish the debt for purposes of collection.

"[The] conclusion that a debt is no longer collectible following the issuance of a 1099-C appears to be in conflict with the Internal Revenue Service's interpretation of its own rules. See IRS Info XXXX-XXXX, 2005 WL 3561135 ("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."); IRS Info XXXX-XXXX, 2005 WL 3561136 ("Section 6050P and the regulations do not prohibit collection activity after a creditor reports by filing a Form 1099-C."). " Woltring v. Specialized Loan Servicing, LLC, No. 14-CV-222 (E.D. Wis. June 16, 2014).

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10 minutes ago, Clydesmom said:

See my answer above but if the company does not issue the 1099-c they can continue collection efforts including getting a judgment.  It is only if they do issue the 1099-c and the consumer has to declare it on their taxes that they must cease collection efforts.  

This is an important issue. Aside from being convinced that it is "patently wrong" to resume collection activity after cancelling a debt, can you cite to any binding authority that supports your position that the issuance of a 1099-C precludes subsequent collection activity?

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17 minutes ago, nascar said:

Aside from being convinced that it is "patently wrong" to resume collection activity after cancelling a debt, can you cite to any binding authority that supports your position that the issuance of a 1099-C precludes subsequent collection activity?

Yes:  it is mostly tax law related to bankruptcy.  From an article on Forbes:  http://www.forbes.com/sites/peterjreilly/2013/05/20/bank-cannot-issue-1099-c-and-subsequently-try-to-collect/#60f4366152df  The problem is even the tax code is confusing as to what the consumer/creditor should do and in regards to collection.

So the rule is that the financial institution should send you a 1099-C, which will prompt you to report income and pay tax on it, even though the institution might decide to chase you for the debt in the future.  The Reeds were upside down on a property that was foreclosed by the First Tennessee Bank.  The property had a fair market value of $262,500 and a loan balance of $267,574.18 so Form 1099-C was issued in the amount of $5,074.18.  Then on April 8, 2011 the Bank filed a lawsuit to collect the $5,074.18, which had grown to $12,075.17  with interest and attorney fees.

The Reeds filed for bankruptcy in January 2012.  The bank filed a claim based on the prior lawsuit.  The amount had now grown to $18,824.71.  The Reeds argue that the Bank had thrown in the towel when it issued the 1099-C.  The Bank, relying on the IRS guidance, argued that the 1099-C was not an admission that the debt was no longer due, but rather an effort to be in compliance with reporting regulations. The Court ruled against the Bank:

It is inequitable to require a debtor to claim cancellation of debt income as a component of his or her gross income and subsequently pay taxes on it while still allowing the creditor, who has reported to the Internal Revenue Service and the debtor that the indebtedness was cancelled or discharged, to then collect it from the debtor.  …… The court does not agree with the argument that because a Form 1099-C can be corrected or amended, it cannot constitute an admission by a creditor that a debt has, in fact, been discharged or cancelled and that the debtor is no longer indebted thereon.

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25 minutes ago, nascar said:

This is an important issue.

Yes it is.  From the IRS website:

https://www.irs.gov/uac/About-Form-1099C

The IRS even calls it a "Cancellation of Debt" form to report the amount as income.  Even going so far as to describe it as "cancelled, forgiven, or discharged" debt.  Well if the debt is cancelled/forgiven/discharged via that form and the consumer/tax payer did declare it on their taxes as income then what gives the creditor or subsequent buyer to collect?  I would argue (if sued) that once the debt was cancelled and I paid taxes they gave up their right to collect.  

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7 minutes ago, Clydesmom said:

Not "binding authority" any means. These reporters almost never accurately portray the facts. In any case, your article cites what I just pointed out, "... because a Form 1099-C can be corrected or amended, it cannot constitute an admission by a creditor that a debt has, in fact, been discharged or cancelled and that the debtor is no longer indebted thereon."

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It is not either. It was a bankruptcy case where the issues were completely different. If you insist on being condescending and argumentative about a topic you clearly do not know anything about, I'm going to have to pull your plug. I thought you understood that.

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5 minutes ago, nascar said:

... because a Form 1099-C can be corrected or amended, it cannot constitute an admission by a creditor that a debt has, in fact, been discharged or cancelled

The problem is, I have received a 1099-c from a creditor who sold it off about 18 months later and the JDB filed the lawsuit.  I have been trying to see how to attack such an issue.

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1 hour ago, nascar said:

I have my own opinion on this but, to be sure, it is not consistent with the majority. I am not a tax guy, so maybe I just don't get it. In the case of the tax implications of a cancelled debt that has subsequently been reduced to a judgment, does anyone know whether there is a mechanism in the tax code that exempts payments made in satisfaction of a judgment when the debt has earlier been cancelled and the taxpayer has already paid tax on the debt once?

The OP didn't say anything about a 1099-C in his first post.  

In regard to that issue, when one pays taxes on a discharged debt, he doesn't pay the entire debt.  He only pays part of it in the form of taxes.  In my opinion, if a  creditor or JDB later sues for the debt after a 1099-C has been issued and the consumer has paid taxes on that debt, the amount paid in taxes should be deducted from the charge-off balance.

 Carrington Mortg. Servs., Inc. v. Riley, 478 B.R. 736, 744 (Bankr.D.S.C.2012) (stating that the debtors' credit report and Form 1099-C received from the lender were "not dispositive, and there is no evidence that the note has been satisfied.")

 

This is from a TN federal court which doesn't seem to agree with other courts.

In re Reed, 492 BR 261 - Bankr. Court, ED Tennessee 2013

Because it is not reasonable in light of its conflict with sections of the United States Code, the court does not agree that the Internal Revenue Service's interpretation that the filing of a Form 1099-C does not prohibit further collection of an indebtedness against a debtor is entitled to deference when a debtor has, as required by the Internal Revenue Code, relied upon the Form 1099-C and included the discharged or cancelled debt in gross income for the purpose of determining the debtor's taxable income.  It is inequitable to require a debtor to claim cancellation of debt income as a component of his or her gross income and subsequently pay taxes on it while still allowing the creditor, who has reported to the Internal Revenue Service and the debtor that the indebtedness was cancelled or discharged, to then collect it from the debtor.   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. The court does not agree with the argument that because a Form 1099-C can be corrected or amended, it cannot constitute an admission by a creditor that a debt has, in fact, been discharged or cancelled and that the debtor is no longer indebted thereon. See Zilka, 407 B.R. at 689.

 

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32 minutes ago, CommoSGT said:

The problem is, I have received a 1099-c from a creditor who sold it off about 18 months later and the JDB filed the lawsuit.  I have been trying to see how to attack such an issue.

The KY Court of Appeals has addressed the issue.

Lifestyles of Jasper, Inc. v. Gremore - KY Court of Appeals, 2009

The undisputed evidence before the trial court was that Acuff owed a judgment to Lifestyles and had made no payments.   Lifestyles had made sporadic attempts to collect. In response to I.R.S. regulations which appear to require the filing of a Form 1099-C, Cancellation of Debt, Lifestyles did so. However, while the district and circuit courts held that Acuff's debt was discharged due to Lifestyle's filing of Form 1099-C, the regulations and I.R.S. rulings make clear that Form 1099-C is to be utilized for reporting purposes only, and not as evidence of an actual discharge of indebtedness. Thus, the issue in this case is whether the district court abused its discretion by sustaining Acuff's challenges to Lifestyles' garnishments, and holding that the default judgment was discharged.

Since the only evidence before the trial court was that the judgment had not been paid and that Lifestyles filed the Form 1099-C only to comply with I.R.S. regulations, and not in satisfaction of the debt, the district court abused its discretion in holding that the judgment was discharged.

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Thank you all for replying. You guys brought new insight to my situation. However, it seems,  I should have taken the steps you all mention prior to the court ordered judgement against me. Also, it looks like there's argument on both sides (creditor allowed to collect on charge-off debt, issuance of a 1099-C and creditor allowed/not allowed to collect on debt) therefore if the BofA attorney filed a civil claim against me post 1099-C, I would argue I paid taxes on the debt, but it will be up to the judge on which way he would want to rule, given there's precedence on both sides.  When I spoke to an attorney about the creditor collecting the judgement and benefiting from the "tax break" of it being a write-off, he simply said, "that's just the way it is." 

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