Defaulting On a Debt 

Perhaps you weren’t able to make payments on your credit card. The card was charged off, meaning, the credit card company is allowed to write off the account as a loss, for tax purposes. 

At this point, the card issuer might turn the account over to a collection agency, which will try to obtain payment on the account. In other cases, the card company will hold onto the account themselves, and seek payment.

Forgiveness Of The Debt 

However, there is a third thing which could happen: The credit card issuer might forgive the debt. Why would they do this? After all, you owe them money. Don’t they want to get paid?

In some cases, the card issuer might decide that it isn’t worth their effort to collect a debt. In other instances, you might have settled a debt for less than the full amount owed. This means you paid less than the full amount owed, and the debt was treated as settled and closed. 

In either of these cases, the credit card issuer will probably send you a letter, informing you that the debt has been forgiven. They will also issue a tax document, usually an IRS form known as a 1099-C.

This document indicates that the debt that was owed has been discharged, and that you may owe taxes on the amount of the debt that was forgiven. For any debt over $600, a creditor is required by law to issue a 1099-C. If you recieve a 1099-C, you will want to consult with an account or other tax professional, if you have questions about how much you’ll owe.

Debt Forgiveness & Credit Reporting

After receiving a 1099-C, how should the debt appear on your credit reports? This has been a point of confusion for some time. It has been brought to court on multiple occasions, and courts in different parts of the country have ruled differently. 

Some courts have held that a 1099 being issued means that the balance reported on a charged-off debt must be set to $0. Others have said that a 1099-C does not end all rights of a debt collector to collect on a debt. Thus, debt collectors can continue to report balances on a credit report, and even engage in other collections efforts on a debt. 

How You Should Handle Forgiven Debts On Your Credit Reports 

While courts in different parts of the country might have ruled differently, it is possible that you might be able to have the balance on this account removed from your credit reports, and set to $0. You can do this by writing to the credit bureaus, and attaching a copy of your 1099-C, as well as your credit reports. Inform them that based on your understanding of the law, the balance on this account should be listed as $0.             

In the alternative, you can contact a local attorney, who specializes in the Fair Credit Reporting Act, and find out whether your part of the country allows for lawsuits, in cases where a forgiven debt is reported with a balance. In such a case, after disputing the item several times, your attorney can file a lawsuit, and probably settle the case, in exchange for deletion of the balance owed, or perhaps the account as a whole. 

Doing this won’t cost you anything, because your attorney’s fees are paid through any settlement reached with the credit bureaus. Avvo is a good place to find an attorney who can assist in this area, as well as the National Association of Consumer Advocates (NACA). 

The Final Word

Debt forgiveness can be a rather confusing part of credit (and the law in general) to understand. You end up owing taxes on a debt, even though the debt itself has apparently been forgiven. Yet, the debt continues to appear on your credit reports, with the amount that was forgiven supposedly still being owed. 

For these reasons, it makes sense to dispute any balances which appear on an account which has been forgiven. If the balance is not removed, you should definitely contact a local credit repair attorney, and ask them to review your report, and see whether filing a lawsuit might be possible.