If I Got a 1099-C, Can I Still Be Sued for the Debt?
- A creditor must file the 1099-C with the IRS if it agrees to accept less than payment in full on a debt. You must owe the creditor at least $600 before it can file the form. This may mean that the debt has been discharged in bankruptcy, the debt is unenforceable because of a court proceeding such as a foreclosure, the statute of limitations for the debt has expired or some other law is in effect that makes the debt noncollectable. A creditor must also file a 1099-C if it has reached an agreement with the debtor to cancel the debt or if the creditor has a written policy on when to quit pursuing debt repayment. If a creditor is required to file a 1099-C with the IRS, it must also provide a copy of the 1099-C to the debtor.
- Even if you get a 1099-C, you may still be sued for the debt indicated on the form. In some situations, your creditor may sue you for the debt indicated on the 1099-C. Generally, if the creditor can show it issued the 1099-C because it was legally obligated to do so, not because it intended to discharge the debt, it may continue to attempt to collect the debt.
- State law also plays a role in determining whether a creditor can sue. In so-called recourse states, creditors may pursue a debt even after discharge. This generally occurs on short sales and mortgages of homes. The lender may try to collect the difference between what is owed on the mortgage and how much the house actually sold for. Nonrecourse states generally do not allow creditors to continue trying to collect the debt.
- A 1099-C can also trigger tax consequences. The IRS considers the money you no longer have to pay on the discharged debt as income. This means you may have to pay income tax on the amount of the discharged debt. For example, if you had a loan for $20,000 and paid back $15,000 of it before the creditor discharged it, you would owe income taxes on the remaining $5,000. Some debt cancellations are not subject to income tax. These includes cancellations due to bankruptcy, insolvency and some debts related to farming. In addition, if the terms of your loan agreement specify that the loan is a nonrecourse loan, discharge of the debt combined with repossession of the collateral on the loan will not trigger tax consequences. Finally, the Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners to exclude from income debts related to foreclosures or debt restructuring in the years 2007 through 2012.
- Don't assume that your receipt of the 1099-C is the end of your debt liability. If you receive a 1099-C, consult with an attorney as you could face both tax and legal consequences.