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…)