Collection Agencies Sending Out 1099-C Forms For Zombie Debts?

It seems that some bottom-feeding debt collection companies—the ones who buy old debts that are frequently beyond the point where you can be sued for collection (what the FTC calls “time-barred debts”)—purchase old debts, mark them up with incredibly high penalties and fees, then “forgive” them and write them off as tax losses and send the debtors 1099-C forms—which means you have to pay taxes on the forgiven amount. If this happens to you, here are a few things you should consider first.

Every state has its own statute of limitations that determines when you can no longer be sued for old debt; however, the FTC says that doesn’t prevent collection agencies from attempting to collect time-barred debt provided they don’t harass you or engage in anything illegal. Collection companies aren’t allowed to collect more than the original debt, “unless your state law permits such a charge.” Debt included in a bankruptcy can’t be collected at all.

To be considered a “forgiveness of debt” (and therefore taxable), the amount has to be less than the original debt.

None of this answers whether or not it’s possible for the following to occur:

  • 1. A collection agency legally (according to state law) adds lots of fees to your debt;
  • 2. It then “forgives” your inflated time-barred debt without contacting you, resulting in a plus-sized 1099-C in your mailbox.

If you receive an unexpected 1099-C for a time-barred debt, you should definitely contact an accountant or lawyer to review your options, and to make sure that what the collection agency is doing is legal.

(Thanks to Royce!)

“Portfolio Recovery Associates in Financial Trouble?”

“Time-Barred Debts” (PDF) [FTC]
“Fair Debt Collection”
Zombie Debt
(Illustration: richt…)


Edit Your Comment

  1. gorckat says:

    Hmmm…might be time to start a home-based collections business and write off, oh…~75k of uncollectable debt.

    I think that’ll about cover me :P

  2. Chairman-Meow says:

    Zombies………they creep me out.

  3. XTC46 says:

    @gorckat: the down side is, you need to show proof that you purchased that debt, and 75k in debt would probably cost you around 10-20k. Id rather pay the taxes personally…. I wonder if one can buy their own debt…then forgive it.

    Say you owe visa 10k, and you claim to be a 3rd party wanting to buy the debt for 4k…I doubt they would sell such a small amount, but it might be fun to try.

  4. LorneReams says:

    Wow, are they going to be surprised since the government is freezing this tax write off till 2010.

  5. @xtc46: But you should take out a loan to buy the debt with.

  6. nweaver says:

    It’s an interesting question whether this would stand up. Well, there’s two parts…

    The 1099C to the debtor? That might very well hold up, WITH the value that the vulture collector puts on it.

    The tax writeoff of the full 1099C value? That might be hard, I don’t think the IRS would go for that.

    So depending on how the IRS calls it, it can screw the debtor without helping the vulture!

  7. ancientsociety says:

    “statute of limitations that determines when you can no longer be sued for old debt; however, the FTC says that doesn’t prevent collection agencies from attempting to collect time-barred debt provided they don’t harass you or engage in anything illegal.”

    ….Wait, WTF!? So, technically, there really is no statute of limitations. If there were, collecting the debt WOULD be illegal and hence the FTC wouldn’t allow it.

    How long until we reintroduce debtor’s prison?

  8. SuperBry. says:

    I come from a family of collectors so I have some background in this, when you buy debt from companies you rarely are able to pick and choose whose accounts you get. You get a book of debtors with varying amounts. So it would be a no go to call up Bank of Satan, I mean Bank of America and ask for all of James Doe’s debt to buy.

    However my uncle, who is a tax genius, thought of a great way to get out of issuing 1099-C’s that collectors are required to issue out on debt that they no longer intend to collect. He came up with selling the debt that we owned to the debtor so they could choose to either forgive themselves or pay themselves off. It saved a ton of paper work and time for both the debtor and collector.

  9. sleze69 says:

    Check out this discussion about PMA’s 1099 shenanigans.

    Someone explain to me how this is actually profitable for them. They pay $.10 for an expired debt and claim a loss?

  10. edrebber says:

    Lawyer and accountant fees would probably add up to more than any tax payment they could save.

  11. edrebber says:

    @sleze69: The loss is the original value of the debt.

  12. sleze69 says:

    @edrebber: But how is that making them money?

  13. Tank says:

    go to ripoffreport dot com and search for CAMCO. they got their asses in a sling for collecting time barred debts.

  14. Tank says:

    @sleze69: they take it as a loss, and write it off their books, offsetting taxable profit.

    the catch is when they do this, they are saying they will never try to collect it again. if they do try to collect it, or sell it to someone else, that is a federal violation.

  15. Simple solution: Don’t let your debt go to collection. Don’t wreck checks your salary won’t cash.

    @Sleze69: You have a debt of $100 with Company X. It’s beyond the time they can sue you for it. They write it off, which is dead weight loss to them.

    Scumbag Me goes to Company X, and I buy said debt for pennies on the dollar, let’s call it $10. I then add my $10 to the $100 of debt I just bought as a transaction fee, and because I had to drive somewhere and take my wife to dinner, we add some other fees to it. Your $100 is now up to $150 with my fees. I now write it off to offset revenue from other activities I might have profited from, so I get to keep a larger share of my profits. It’s a tax shield. Since I’m incorporated, write offs count against revenue, so it’s a dollar for dollar tax savings to me, the incorporated individual. $150.

    The original company can book $90 in tax shield, plus $10 on a debt they were going to have to write $100 off on. They are making the best of a bad situation.

    You, you are screwed. But you’re only screwed because you got services worth $100 from Company X, and never paid for them.

    If Sleazy had paid his bill on time, none of this would have ever happened.

  16. DeeJayQueue says:

    I wonder…
    if you paid that 1099C, then you, the IRS, the FTC AND the collection agency would all have a record that the debt was forgiven. Even if they inflate it with ridiculous fees, you’re only paying the tax on it, and you can probably get the fees knocked off. So that’s like, what, a percentage of what you may have originally owed? Even if the debt is past the statute of limitations on collectibility, they won’t stop trying unless you force them to, and this would be a way of proving that the debt doesn’t exist anymore.

  17. FreemanB says:

    @ancientsociety: The statute of limitations only limits how long they have legal means to try to collect the debt, using the courts to enforce the debt. They can still ask for the money after that, but if you say no, they can’t try to collect the debt through the court system.

    If you borrowed $500 from me and didn’t pay it back for longer than the statute of limitations, that wouldn’t stop me from asking you to pay it back. I just couldn’t sue you to try to get it back.

  18. yesteryear says:

    this is why america is retarded. someone without insurance can rack up $10k in medical debt by spending 1 day in a hospital and this will haunt him or her for the next 7 years on their credit report… but a corporation can purchase old debt and then turn around and make money off of it? maybe i’m not understanding this completely, but what i am understanding is making me really angry.

  19. ludwigk says:

    @DeeJayQueue: If they load the debt with ‘ridiculous’ fees, then you may be paying equal, or more than the original debt in taxes, which is one thing TFA points out is possibly illegal.

    Debtors may be hard to avoid, but the IRS? No thanks.

    I’m guessing this is just a tax loophole to generate a large tax shelter for companies.

    Yet another reason I’m glad, and fortunate, to be debt free.

  20. yesteryear says:

    @PotKettleBlack: i know i just posted about this… but i have to respond to your comment. not everyone who has debt in collections got to that point by purchasing designer jeans and plasma TVs. for many it was a root canal or an x-ray.

    as far as consumer debt is concerned… believe it or not one of the “solutions” that the senate is proposing to deal with the credit crisis is funding ‘financial literacy’ courses for high school students. why on earth weren’t they funded before? because it’s not in the best interest of the banks and other lending institutions for average folks to know what they are getting into when it comes to money.

  21. Roycester says:

    Bud Hibbs quotes the PRAA (Portfolio) stock price on Tuesday when the article went up on his site…as of 2 PM today it’s down 12%. I thought that was interesting…

  22. Roycester says:

    The real danger is that Portfolio – or others using the same tactics will repackage this same debt in another group and sell it again. Some poor unsuspecting consumer down the line has to start the battle all over not recognizing the new amount…

  23. TechnoDestructo says:


    If you’re under debt you can’t pay off, it could still put you in a better position. I think it’s a brilliant idea.

    How much does it cost to become a licensed debt collector?

  24. TeeDub says:

    It is that kind of outside the box thinking that makes me proud to be an American. Congratulations to the debt collectors and I hope that this makes people think twice about buying all that stuff that they can’t afford. It is about time that people were forced to take some measure of personal responsibility.

  25. quail says:

    No one else mentioned it so I will. The credit companies are making crazy money even with the numbers of bankruptcies and unpaid debts. The fault rate is built into their business model, and successfully too. It will be interesting to see how the domino effect from the subprime meltdown will affect the credit companies.

    As to the 1099-Cs being handed out by collection agencies, it would be cheaper to pay the tax vs paying the debt. And the IRS will work out an easy payment plan for you if you need it. But I’d suspect the IRS would get upset if the collection agency is over inflating the numbers. It would be like you saying that your clothing donation to Goodwill is worth it’s full retail replacement price. I can see these companies getting into trouble eventually.

  26. Empire says:

    @ancientsociety: I think the Republicans are drafting something right now.

  27. BrockBrockman says:

    Figures that the impending zombie invasion is somehow linked to both debt collectors and taxes.

  28. Greasy Thumb Guzik says:

    Why is there always a troll who insists that all debts were properly incurred by the person the collection agency is after.
    Many times it’s a lazy ass pile of shit at one of these scumbag dumps that just goes to the phone book & finds someone with the same name & puts them on the debt.
    Other times it’s a “debt” that was disputed & resolved, but for some reason it wasn’t pulled off the books by the originator, so the agency buys the debt for pennies on the dollar & hopes to scare the shit out the “debtor” & make some money off of them.

    The overwhelming majority of collectors are the scum of the earth.
    And so is anyone that defends them!

  29. the_wiggle says:

    @ancientsociety: not long at all what with the subprime mess, health care mess, etc.

  30. bohemian says:

    The majority of the bankruptcy filings are for medical bills. So one would assume that quite a few of the debts going to collectors would also be medical bills.

    So some of the people having this done to them was because they got sick or hurt. They may have had insurance too. Plans have a pesky way of having lots of loopholes that can leave patients holding the bag for some pretty huge debts.

  31. sleze69 says:

    @TeeDub: I have a debt on my credit because Verizon refused to refund the ETF after I cancelled my account within the first 30 days of service (the trial period in which they aren’t supposed to charge you an ETF). Did I fail to practice personal responsibility?

  32. howie_in_az says:

    @TechnoDestructo: I’m not sure how much it costs but I just had the wild idea of forming a company with the sole purpose of buying my own family’s debts (not that we’ve got debt, but hear me out). I can then rack up tons of charges via credit cards and the like, wait for those to come into the collection phase, then have my company buy the debt for pennies and say it collected on the debt.

    It’s the ‘marekin way, yesno?

  33. picantel says:


    Did a collection agency named AFNI put it on your credit? Verizon/AFNI and Sprint/Cavalry combos are famous for that crap.

  34. jeffjohnvol says:

    If you borrow 10,000 and don’t pay it back. Its income. That is what the deal is. I don’t blame them for issuing 1099-C’s. The same deal applies with some mortgages that are forgiven.

    Pay your debt and you won’t get one.

  35. Mr. Gunn says:

    jeffjohnvol: “Pay your debt and you won’t get one.”

    Unless some shady company assigns someone else’s debt to you, or a company forgets to take a resolved debt off the books and a collector buys it. Yes, this does happen. I had to dispute a entry for some dude in Mobile’s cellphone that some collector had reported as mine. It was only on one bureau, so it came right off, but just shows how error/fraud prone the whole thing is.

  36. jeffjohnvol says:

    @Mr. Gunn: Those are cruel exceptions to the rule, but I would venture to say that most situations are people that default on loans. The shady companies that commit fraud should be prosecuted.

    You can challenge 1099’s and 1099-C’s I imagine with the IRS. I have done so myself successfully when I was able to demonstrate that I didn’t have the income.

  37. CafeSilver says:

    I had about 7k dollars worth of credit card debt that eventually went into collections and was passed around for years before I was able to finally pay it. Being passed around for years it collected fees and interest making the amount over 20k dollars. The creditor it was currently at when I paid it offered me a settlement amount close to the original amount, but slightly less. The settlement amount was $6036. The settlement letter that I signed states that the debt is considered settled in full. Which basically means they can’t pass off the remaining amount to another creditor or try and collect that later. It also means they can’t declare the remaining $14k as a tax write off. But that doesn’t mean they aren’t going to try. Earlier this week I got one of these 1099-c forms that says the creditor “canceled/forgave” $12800.

    This is the kind of shady bs they these companies take part in. Now I have to call them, tell them correct this mess and more than likely argue with them to do it. Most likely they will refuse and I will have to hire an attorney to make this crap go away.

    I can understand if I didn’t pay them at all and they wrote off the full amount, but that isn’t what happened here. They got a good profit from that amount I paid them. They most likely bought my account for a few cents on the dollar. So to try and pull this on me and take a tax write off is just ridiculous. These 1099-c forms aren’t being sent out to accounts that haven’t been paid. They are being sent out to accounts they have already collected on and they are just trying to get a little extra topping.

  38. SacraBos says:

    @sleze69: They pay $.10 for a $1 debt, and write off the $1.00. Next they pay $.10 for a $1.20 debt, and the debtor pays.

    You’ve paid $.20, collected $1.20 – $1.00 profit. But you have a “loss” of $1, which means you “made” $0. You pay tax on $0, even though you made a $1. Rinse, repeat, profit – tax-free!

  39. melissasaurus says:

    Most consumer creditors are required to file 1099-C’s (like employers are required to file W-2’s). The money you receive from a loan is not included in your income (on the assumption that you have to repay it). If you don’t then you’ve just received money tax-free. Taxing the cancellation of indebtedness fixes this loophole.

    Just because a statute of limitations has run doesn’t mean that a creditor can’t attempt to collect from you. It just means that a lawsuit against you for the amt will be dismissed. Watch out though, because in most states paying anything on the debt after the statute of limitations has lapsed will restart the limitations period.

  40. ihateauditions says:

    I’ve been on this site for a while, but I’m still always surprised when some high and mighty asshole claims that all debts are because of a failure of personal responsibility.

    Whenever I read those comments, I hope for that person to lose their job, then have their wife get a terminal disease the next day, then have their child diagnosed special needs the day after that, then have a stroke that leaves them unable to perform high-level duties the day after that.

    Sure, it seems extreme, but wastes of oxygen like Teedub won’t understand that shit happens until it happens to them.

  41. banmojo says:

    I wanna know how I can buy up some old debts for 10 cents on the dollar which I can use to offset my taxes! Shoot, I’ll MAIL out that muthaf$%#ing 1099 form, shit, this lowers my effective taxes from 33 cents on the dollar down to 10 cents on the dollar, that’s some savings! And this is legal? Some super duper tax lowering loophole? FTW!!

  42. picantel says:

    If at the time of default you had more debts than assets you do not have to pay the so called forgiven debt. It is called insolvency. Since most people who cannot pay the debt do so because, well, they have no money that is an easy way to get around paying the taxes.

    • bbb111 says:


      The Insolvency Exclusion is shown in IRS Publication 4681 page 4

      Also, farm debt, certain business property debt, and principal residence debt can be excluded.

      These exclusions of all or part of the amount shown on a 1099-C are entered on form 982.

      If they increased the basis of the debt this may be disputable. There are rules for changing the basis of a debt. (There are also rules for determining if forgiven interest is considered income – the forgiven interest should be reported as a separate line item on the 1099-C.)

      Instead of the regular IRS help line, try the Taxpayer Advocate Service:
      “The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.”
      They might help with sorting out the rules and tell you if a Tax Fraud Complaint is in order. A good Tax Accountant can help, but they do not work for free. (Do not use a local bookkeeper or a Tax Preparation franchise.)

      Another method (after disputing the amount) is to include the amount as income and then exclude it as an error correction with a letter and documentation – I did this for an incorrect 1099-DIV that showed incorrect dividends from after I sold the stock. It worked, but the amount was only about $20.
      If the 1099 has been filed, then that amount MUST show on the tax return or your return automatically gets marked for investigation.

  43. FinanceGuru says:

    @PotKettleBlack: When you buy something “worth” $100 for $10, your income tax basis (within the meaning of 26 USC § 1012) in that asset is $10. So, if you were to turn around and collect the full $100 on the loan you purchased, you’d pick up $90 of ordinary income.

    If § 1012 were not the law, then you could arbitrarily say that every asset you purchased was “worth” more than you paid, turn around, sell it for what you paid for it, and claim a loss.

    Also, if you took your wife out to dinner, you don’t get to add that amount to the $10 of your basis in the loan. Assuming, arguendo, that taking your wife out to dinner was deductible, it’d be a current deduction, under 26 USC § 162, not includable in your loan basis under 26 USC §§ 263, 263A. But really, it’s probably a personal expense within the meaning of 26 USC § 262(a), which generally provides that personal expenses are not deductible.

    Finally, you don’t get to arbitrarily add “fees” to your basis in the loan you purchased and then write it off when you can’t collect it. Again, if you could, as a practical matter, you’d inflate your basis in these loans, and then write them off to claim the loss. The Internal Revenue Code and Income Tax Regulations provide detailed rules under which you are permitted to add to the basis of your assets.

  44. FinanceGuru says:

    @SacraBos: That’s not how it works. See my comment to potkettleblack.

  45. jeffjohnvol says:

    My in-laws got in a ton of CC debt. My father-in-law eventually got terminal cancer and died. My mother-in-law is trying to survive with our help and SSI, but all of their kids still agree that despite how much they love their parents, they were fiscally irresponsible. They shouldn’t by presents for 18 grandkids when they are 30K in debt with CC’s.

    Although I will say, the’s CC companies that charge 24% interest ought to be strung up. My father in law had some CC’s in his name only that had the 24% rate and the CC’s had to eat it, and I’m glad they did.

  46. smokinfoo says:

    Consider this situation:

    Wilma a little old lady takes out a NET 30 account with a company (like a taxi company). Wilma lives on social security and is otherwise judgment proof from debt collection.

    How do you get Wilma to pay? Cut her a 1099C for the amount of debt and forgive it.

    Now she has the choice of paying the debt or loosing her social security because her income increased considerably due to the 1099C being consider income.

    Now you might say “Oh, poor Wilma being victimized by the big mean company.”

    When in fact the situation is quite the opposite. Wilma tried an end around for paying for the services that she used. Should the company in question have cut her off sooner? Probably, but you have to consider the careful balance of simple humanity (i.e. not cutting off someone’s only source of transportation) and business needs.

    The company I speak of is of course my own, of which I own part of along with several hundred other people. If we had our choice we hopefully never be in this situation. When Wilma eventually decides to pay her debt we charge a flat $25 fee late fee and setup a reasonable payment plan. All the while the customer is still welcome to take cash rides.

    Lesson learned don’t extend yourself beyond your means.

    This could easily be the tool of slimy debt collectors or that of a small company who has NO other recourse.

  47. Buran says:

    @smokinfoo: In other words, you’ll destroy someone’s life (people on fixed incomes often have nothing else) to get your money. Do you really need it that badly, and do you really have that little compassion for your fellow human? It’s one thing to pull that on people who can afford it, another to pull it on someone’s only lifeline.

  48. That70sHeidi says:

    I always love reading threads like this so I can return to feeling bad about myself for being a whistle blower and losing my job, thus beginning the spiral towards bankruptcy, which apparently is a sin worse than abortion on Consumerist (although we’d need a poll to confirm that).

    Hmmmmmm, say nothing and be approved by strangers on a board because my soul-sucking morally bankrupt and ethically retarded employer is still paying me …. OR …. living a just and guilt-free existence knowing I did the right thing and got screwed in SO many more ways than one (for years to come, too!) and would do it again in a heartbeat… HARD CHOICE.

    And as an aside, not one person in my hearing sat there and said “overspending” was their cause, it was medical bills, layoffs, children with diseases, etc. My attorney even said that I had such a minimum amount to declare (I was paying rent and bus fare to a low paying job with credit) compared to others who lost their jobs.

    eff you to all you self-righteous asses… may you never have to make a choice between right and wrong.

  49. elijah_dukes_mayonnaise says:
  50. atroxodisse says:

    In California you have 4 years(for written agreements) from the time the debt is written off to collect the debt. This number varies greatly from state to state. []
    What this means is they have 4 years to sue you. After that they can still try to collect they just can’t use the courts to do it.