Neither Forgiven Nor Forgotten: Taxation and UDAAP Concerns With Collecting Charged Off Debt

Bloomberg BNA
10 minute read | May.24.2018

When debtors are unable to pay their debts, creditors are left with a choice: (i) allow the consumer to pay a lesser amount, if possible, to settle the obligation and recover some funds; or (ii) charge off the debt and cease all collection efforts. Regardless of the path chosen, each has potential implications for both the creditor and debtor.

As discussed in our November 2, 2017 article in BNA’s Banking Report, when creditors settle the debt by allowing a debtor to pay less than the amount due, this may result in unanticipated consequences for debtors, largely centered around potential tax liabilities for the forgiven amounts. If, however, the creditor determines that the debt is simply uncollectable and “charges off”—or internally declares uncollectable—the remaining amount of the debt, other potential issues may arise if the creditor later decides to resume collection efforts. While a debtor may believe that the creditor cannot take further actions to collect charged off debt after sending a Form 1099-C related to that debt, this is not always the case, and the resulting confusion can create challenges for both debtors and creditors. Such post-charge off collection activities may raise legal issues under federal consumer protection laws, and creditors should proceed with caution.

Originally published in Bloomberg BNA; reprinted with permission.