Appeals Court Upholds Creditor’s Right to Collect After Issuing 1099-C Notice to Plaintiff

The Court of Appeals for the Third Circuit has upheld a lower court’s dismissal of a class action alleging a defendant violated state law in New Jersey by attempting to collect on a debt after it had issued a 1099-C notice to the plaintiff to cover the amount of the debt that was discharged.

A copy of the ruling in the case of Gericke v. Truist can be accessed by clicking here.

The defendant obtained a judgment against the plaintiff and his wife for an unpaid debt. After the plaintiff and his wife were unable to satisfy the judgment, the defendant issued a 1099-C form from the Internal Revenue Service to the pair, indicating that $199,427.80 of the $244,248.49 was discharged. Creditors and collection agencies are required to issue 1099-C forms whenever a debt of more than $600 is canceled, because the amount of canceled debt can be treated as income as far as the IRS is concerned.

After issuing the 1099-C, the defendant notified the plaintiff that the judgment had not been released and the plaintiff was still expected to either pay the judgment or reach a settlement. The plaintiff sued, alleging the defendant violated the New Jersey Consumer Fraud Act and the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act. A District Court judge granted a motion to dismiss filed by the defendant, which the plaintiff appealed to the Third Circuit.

The plaintiff’s argument is that creditors should not send 1099-C notices unless the debt has really been canceled, and that sending the notice while still intending to collect on the debt is an “unlawful practice.” However, the regulation requiring the issuance of the 1099-C notice is separate from whether or not the debt has actually been discharged, the Third Circuit noted. “Based on the text of the regulation, the filing of a Form 1099-C is a reporting requirement that does not depend on whether the debt has been ‘actually discharged,’ or the debtor has actually been released from his obligations on the underlying debt,” the Third Circuit wrote. “The satisfaction of this reporting requirement, additionally, does not operate to forgive or extinguish a debtor’s obligations to repay the debt at issue.”

Check Also

Settlement Offer, Tradeline Deletion Mention in Letter Leads to Class Action Against Collector

EDITOR’S NOTE: This article is part of a series that is sponsored by WebRecon. WebRecon identifies serial …

Leave a Reply

Your email address will not be published.