Fraudulent 1099C from JDB's and garbage CA's

Bud Hibbs

Zombie Debt 1099

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 :
“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”.


1099 Forgiven Debt

IRS Rules 1099C

Canceled Debts:

Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income.

You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if you are a farmer). Form 1099-C.

If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C,

Cancellation of Debt.

The amount of the canceled debt is shown in box 2.

Interest included in canceled debt.

If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest will also be shown in box 3.

Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it.

See Deductible debt under Exceptions, later.

If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from box 2 of Form 1099-C. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).

Discounted mortgage loan.

If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

Stockholder debt.

If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is dividend income to you.

If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.


There are several exceptions to the inclusion of canceled debt in income. These are explained next.

Nonrecourse debt. If you are not personally liable for the debt (nonrecourse debt), different rules apply. You may have a gain or loss if a nonrecourse debt is canceled or forgiven in conjunction with the foreclosure or repossession of property to which the debt attaches. See Publication 544 for more information.

Student loans. Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.

You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:

The federal government, a state or local government, or an instrumentality, agency, or subdivision thereof, A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or

An educational institution:

Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

A loan to refinance a qualified student loan will also qualify if it was made by an educational institution or a tax-exempt section 501(a) organization under its program designed as described in (3)(b) above. An educational institution is an organization with a regular faculty and curriculum and a regularly enrolled body of students in attendance at the place where the educational activities are carried on. A section 501(c)(3) organization is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.


You do have income if your student loan was made by an educational institution and is canceled because of services you performed for the institution or other organization that provided the funds.

Deductible debt.

You do not have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Publication 334.

Price reduced after purchase.

Generally, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.

Excluded debt.

Do not include a canceled debt in your gross income in the following situations.

The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.

The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. See Publication 908.

The debt is qualified farm debt and is canceled by a qualified person. See chapter 4 of Publication 225, Farmer's Tax Guide.

The debt is qualified real property business debt. See chapter 5 of Publication 334.