Collectors still calling after a 1099-C 'Cancellation of Debt' tax form

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
I received a Form 1099-C for the 2013 tax year for credit card debt I owed to Chase. The identifiable event code was "G" for "decision or policy to discontinue collection." Now a collection agency is attempting to collect on this debt. It is my understanding that this debt has been forgiven, not merely charged off, and that I no longer owe it. Is this correct? Thank you so much.   -- Dani


Dear Dani,
Though the name printed at the top of the 1099-C form says "Cancellation of Debt," it is not always true to its name. It may mean the bank has forgiven the debt. Unfortunately, you can't count on it.

Banks are required to send you a 1099-C when any "identifiable event" occurs. According to the Internal Revenue Service, an identifiable event could be an agreement between you and the bank, your bankruptcy, expiration of the statute of limitations, debt relief from probate (when someone dies) or any of a number of other similar events. After such events, the debt is generally no longer owed. 

Some "identifiable events" are not such open-and-shut cases. For example, Code G on Form 1099-C is for the "Decision or policy to discontinue collection."

According to  IRS Publication 4681, "Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice."

So if Code G is checked, the bank could have decided to no longer pursue the debt. On the other hand, your debt could just be lumped in with other debts that the bank typically does not pursue, based on established business practices..

It's not unheard of for banks or collection agencies to try to collect on debts for which the debtor has already received a Form 1099-C. Other debtors have argued that receiving a 1099-C means they no longer owe the debt. One problem with that argument, however, is that the 1099-C itself is not an agreement between you and the bank. It's just a form that a bank files with the IRS and sends you a copy of. In fact, some courts have held that the filing of a 1099-C does not in and of itself cancel a debt.

If you have a debt for which you are being pursued, and even if you have already reported the "canceled" debt on your 2013 tax return and paid taxes on it, it's important that you respond to any collection attempts and attempt to resolve the issue, just as you would with any other debt.

Don't ignore debt collectors just because you've already received a Form 1099-C. If you do, collectors may continue to take legal action against you, including attaching liens to your property or seizing your assets. If you owe a lot of money, the collection agency may take you to court or make other serious attempts to collect, so I would recommend that you seek legal help in your state.

See related: 1099-C surprise: IRS tax follows canceled debt

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Updated: 03-23-2019