Collector - June 2017 - 44

COMPLIANCE

Settlements and 1099-C
Should debt collectors notify consumers of potential tax consequences when making a settlement offer?
By Andrew Pavlik

C

reditors frequently agree to settle a
debt for less than the full amount
owed. If the creditor agrees to a
settlement, the Internal Revenue Code
(I.R.C. Section 6050P) may require the
creditor to file a Form 1099-C if the
settlement amount equals or exceeds $600.
In practice, debt collectors may file the
1099-C on the creditor's behalf as part of its
services to the creditor.
While the filing requirements are fairly
clear, what is unclear for debt collectors is
whether the collection agency should notify
consumers of the potential tax consequences
when making a settlement offer, and if they
do, what disclosure should be used. While
federal law does not explicitly address the
need to provide notification of potential tax
consequences, courts have issued varying
rulings on 1099-C disclosures that collectors
should consider.

DISCLOSING TAX CONSEQUENCES
MAY VIOLATE THE FDCPA
Several courts have found notifications
about the potential tax consequence of
a settlement may violate the Fair Debt
Collection Practices Act. In one recent
case, Medina v. Allianceone Receivables
Mgmt., No. 16-4664, 2017 WL 220328 (E.D.
Pa. Jan. 19, 2017), the court denied a debt
collector's motion to dismiss a claim that a
tax disclosure in its letter was deceptive. At
issue in the case was the statement
"[o]ur client [creditor] will report forgiveness
of debt as required by IRS regulation."
In this case, the debt at issue was only
$341.97, which the debt collector offered to
settle for $222.28. Notably, the amount of
the discount was below the $600 threshold
triggering the 1099-C filing requirement.
The court held that a fact-finder could
conclude that the sentence was deceptive
or misleading because a consumer could

44

reasonably understand that the collection
agency was required to report the
forgiveness of any part of the debt to the
Internal Revenue Service, when this was not
actually the case. The court also reasoned
that a consumer could rightly interpret the
statement to mean that the IRS reporting
requirement was mandatory for any debt
forgiveness. Other courts have also found
that similar language violated the FDCPA.

"Courts have issued
varying rulings on
1099-C disclosures
that collectors should
consider."
DISCLOSING TAX CONSEQUENCES
DO NOT VIOLATE THE FDCPA
Other courts have found that tax
disclosures in settlement offers do not
violate the FDCPA. In Remington v.
Financial Recovery Services, Inc., No. 3:16865, 2017 WL 1014994, (D. Conn. Mar. 15,
2017), the debt collector's letter offered the
consumer three settlement options to pay
off a debt of $822.39, and also stated: "This
settlement may have tax consequences.
Please consult your tax advisor."
The consumer alleged, among other
things, that the statement was deceptive,
misleading and that it created a false sense
of urgency. The court rejected these claims,
finding that the debt collector truthfully
advised the consumer that "settlement
options 'may' have tax consequences."

The court concluded that "[i]t would take
a bizarre or idiosyncratic interpretation ...
to conclude that this true statement violates
the FDCPA." In another case, Everett v. Fin.
Recovery Servs., Inc., 2016 WL 6948052 (S.D.
Ind. 2016), a court dismissed a similar claim
regarding the exact same disclosure in a
settlement offer.

NO DISCLOSURE
Debt collectors have also been sued
for failing to advise consumers of the
potential tax consequences of settlements.
Consumers alleged the taxes resulting from
the settlement would diminish the actual
value of the discounts and, therefore, the
failure to notify a consumer is a deceptive
or misleading practice.
Nevertheless, courts confronted with
this question have consistently ruled that
debt collectors have no obligation under
the FDCPA to disclose the possible tax
consequences of debt forgiveness.
This was best illustrated in Altman v. J.C.
Christensen & Assocs., Inc., 786 F.3d 191,
193 (2nd Cir. 2015). In that case, the U.S.
Court of Appeals for the Second Circuit
held "'[t]he language of the FDCPA does
not require a debt collector to make any
affirmative disclosures of potential tax
consequences when collecting a debt...'" A
number of district courts have also ruled
that the language of the FDCPA does not
require a debt collector to make disclosures
of potential tax consequences.
As court decisions continue to emerge, debt
collectors should familiarize themselves with
the case law on this subject and work with
their own attorney when deciding whether
to notify the consumer of the potential tax
consequences of settling a debt.
Andrew Pavlik is ACA International's senior
compliance analyst.

ACAINTERNATIONAL.ORG


http://www.ACAINTERNATIONAL.ORG

Table of Contents for the Digital Edition of Collector - June 2017

President's Page
Industry News
Best Practices
FYI
Collection Tips
In Case of Emergency
Pulling Back the Curtain
ACA International's 2017 Convention and Exposition Preview
Calendar
Honor Roll
Seeing Eye to Eye
The Business Battle
Blueprint for Success
Federal Court Nixes CFPB Enforcement Action That Claimed a Payment Processor Ignored Fraud
Compliance
ACA SearchPoint
Last Word
Collector - June 2017 - Cover1
Collector - June 2017 - Cover2
Collector - June 2017 - 1
Collector - June 2017 - 2
Collector - June 2017 - President's Page
Collector - June 2017 - Industry News
Collector - June 2017 - 5
Collector - June 2017 - 6
Collector - June 2017 - 7
Collector - June 2017 - Best Practices
Collector - June 2017 - 9
Collector - June 2017 - FYI
Collector - June 2017 - 11
Collector - June 2017 - Collection Tips
Collector - June 2017 - 13
Collector - June 2017 - In Case of Emergency
Collector - June 2017 - 15
Collector - June 2017 - 16
Collector - June 2017 - 17
Collector - June 2017 - 18
Collector - June 2017 - 19
Collector - June 2017 - Pulling Back the Curtain
Collector - June 2017 - 21
Collector - June 2017 - 22
Collector - June 2017 - 23
Collector - June 2017 - 24
Collector - June 2017 - 25
Collector - June 2017 - ACA International's 2017 Convention and Exposition Preview
Collector - June 2017 - 27
Collector - June 2017 - 28
Collector - June 2017 - 29
Collector - June 2017 - 30
Collector - June 2017 - 31
Collector - June 2017 - Calendar
Collector - June 2017 - Honor Roll
Collector - June 2017 - Seeing Eye to Eye
Collector - June 2017 - 35
Collector - June 2017 - The Business Battle
Collector - June 2017 - 37
Collector - June 2017 - 38
Collector - June 2017 - 39
Collector - June 2017 - Blueprint for Success
Collector - June 2017 - 41
Collector - June 2017 - Federal Court Nixes CFPB Enforcement Action That Claimed a Payment Processor Ignored Fraud
Collector - June 2017 - 43
Collector - June 2017 - Compliance
Collector - June 2017 - 45
Collector - June 2017 - ACA SearchPoint
Collector - June 2017 - 47
Collector - June 2017 - Last Word
Collector - June 2017 - Cover3
Collector - June 2017 - Cover4
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