I keep seeing this question. It's one I've wondered myself and after researching for years I want to share some of my findings to help anyone asking this question and hopefully gain more insight from all of you.
I'm wanting to touch base on the legal aspect of the 1099c. Yes, there are tax ramifications of the form but I think I will save that for another post. The questions I keep seeing are somewhere along the lines of, "Do I still owe this debt? Will I still be sued if I don't pay?"
The debate over whether or not the issuance of a 1099c legally stands to extinguish the debt is still undetermined. The short (and confusing) answer is yes... no... maybe, it depends?
While the majority of court rulings regarding the issuance of a 1099c, as a defense against a judgement, have sided with creditors, there are still a minority of courts that have sided with debtors. Often stating that is inequitable to require a debtor to claim forgiven debt as income while subsequently expecting them to pay it back. Makes sense from a logical point of view right?
What you must first understand is that the IRS requires a creditor to issue a form 1099c when a creditor forgives a debt or when one of 8 identifiable events occurs whether or not an actual discharge of indebtedness has occurred.
Even more confused? Good, your paying attention then.
This means that when you receive a 1099c the bank actually cancelled the debt, or they were merely complying with IRS regulations because an identifiable event was triggered.
So, how do you know what event triggered the issuance? Look in box 6 on the form and you will see the code that has been reported for the identifiable event. On the IRS website you can find what each code means. If the identifiable event was a bankruptcy or settlement then no, the bank can no longer legally pursue you for the debt. If the code indicates the expiration of a 36 month non payment testing period or bank policy then yes, you can technically still be pursued for the debt.
However, this doesn't mean that the issuance of a 1099c doesn't offer protection from a lawsuit if the institution didn't intend to cancel the debt. If you are worried you will get sued take a minute to put yourself in the shoes of a creditor or debt collector who has issued the 1099c.
Banks are in the business of calculating risk for profit and let's face it, suing someone in court is a high-risk business decision for the sole purpose of generating or preserving the bottom line of their profit margins.
In the wake of the recent 1099c tax mess many creditors have reevaluated their policies on issuing the form. If you received a 1099c then the bank probably truly believes they you aren't capable of paying them their money. But this doesn't mean you won't be able to pay later down the road so issuing a 1099c is a calculated risk they have already taken, assuming the tax benefits of the write off are more beneficial, at least for now.
So how might a 1099c protect you against a judgement? Suing in court is the most expensive way for a creditor to collect. Creditors spend 40-50 cents on the dollar to sue, whereas collecting by telephone and letters only costs 5-10 cents on the dollar. Even still, a court judgement doesn't guarantee the debtor will pay even if a summary judgement is granted. This is why collectors sue less than 5% of the accounts they receive, most of which are won by default without spending any extra money fighting it out in a courtroom and they generally won't sue unless you have some good assets or wages from a decent job that they can get their grubby hands on.
Until the supreme courts rule that the issuance of a 1099c does not stand to extinguish a debt, the 1099c will deter creditors from filing a lawsuit. They know many debtors who received a 1099c will raise the tax form as a defense. Although the form doesn't prove the debt was in fact cancelled, it is prima facie evidence it was cancelled and the creditor will need to provide their own evidence that they didn't actually intend to cancel the debt. This can be a litigation headache that equals to more $$$ spent pursuing you.
Furthermore, the creditor will need to amend the 1099c before pursuing the judgement to show $0 cancelled and forego the tax benefit they received when they filed. Combine this with what I mentioned above about no guarantee of actual payment and the risk of losing the case altogether if your court holds the minority opinion and you've got a pretty good reason to believe the banks will probably select easier targets to sue.
In conclusion, I just don't think very many creditors are risking suing after the issuance of a 1099c. Correct me if I am wrong but the evidence doesn't seem to suggest otherwise. There have been over 6 million 1099c(s) filed every year since 2007, yet you won't find more than a handful of cases that can be sited where a court actually made a determination on this matter. This means that either, all but a handful of cases are won by default and no court opinion is made or creditors just aren't taking chances by suing after issuing a 1099c.
Maybe one of you would care to share some more light in this matter with this own opinion or personal experience?
