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Is the Myth True That Once a Debt is Sold to a Collection Agency It Goes Away?

Written by Steve Rhode

Question:

Dear Steve,

I have 10,000 in debt with a score 610 and 17 derogatory marks…want to know if this myth is true?

If your original creditor sold your debt to a collection agency, they also wrote off your debt on their taxes which wrote off your obligation to pay. You can dispute the transaction via dispute.transunion.com (along with any other collection agency owned items lingering on your report). Your dispute reason is “contract was cancelled” and write “NO CONTRACT” in the dispute comments. I have cleared THOUSANDS off my own report and have been working to help my friends and family do the same! for FREE! Peace and love to all! Knowledge is power! 🙂

Cesar

Answer:

Dear Cesar,

It’s not true.

A write-off is an accounting function and has no bearing on the underlying debt and contract for the debt.

Disputes like this can easily reappear on the credit report when the creditor does the next data dump.

Even more importantly, it would give you and others the false impression that the debt is not collectible. Just because a debt has been written off and reported to the IRS ir can still be collectible and you can still be sued over the debt.

I’m afraid you are conflating apples and oranges here. The sale of a bad debt or the required reporting to the IRS as a bad debt has no impact on the debt owed.

That being said, there are valid ways to verify the debt is currently valid as it passes through new hands but relying on a credit report dispute is not one of them. Don’t forget, there is more than one major credit bureau.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

7 Comments

  • Recently I have choose to check my credit report often after attaining a score of grater attraction to lenders,kept my credit card balance low after being cleared of $8000 debt and cut my spending also i have never missed a payment,good financial track record and all kudos goes to an ethical hacker referred to as hackmania_9 (outlook dot com) who helped me.i have no idea before now that credit scores can also be hacked and raised.

  • Thanks Steve… A creditor can pursue a debt even when not due because it’s not authorized by a Court order to pay. It’s about reporting. A creditor only has to justify a debt is due, unverified. What we are talking about here is disputing a debt a creditor states is due. My point was when a debtor requests a tax reporting document to issue the creditor, the creditor will not comply, meaning the obligation to pay may be voided for federal non-compliance with the IRC., which is why accounting matters. The IRS won’t take action for creditor non-compliance. Though a debt may be due and payable, absent reporting requirements mandated by the IRC may preclude a payable debt because the creditor will not comply with IRC codified law. I understand your explanation, just the reasoning is in question.
    Additionally, a 1099C may be disputed because it may be factually wrong or subjected to modification depending on the debtors financial status when issued. My concerns are debts a creditor states are due, unverified, and what the statutory requirements are due the debtor that will not be followed by a creditor, if the debtor decides to pay the creditor to mitigate any further credit damage.
    And, the cost of legal services rendered to mitigate damage will more likely than not be in vain due to the costs of a lawsuit against the reporter. Again, this is from personal experience, not what should have happened per the statutes. And, reporting this to the AG will get a nice form letter reply.
    Thanks for listening.
    Be Well.

  • Hi Steve…
    I believe you both have valid points. However. When a company writes off a debt, an accounting function, is that debt still due and payable? If it is a court ordered payment, maybe yes, depending on the state law that applies where the Court adjudicated the payable and the statute of limitations. If not Court ordered, the debt has been written to 0, an accounting function. If the debt is paid, the only way one is assured that it is treated as an income item, an accounting function and a legal requirement of the Internal Revenue Code, is to issue a 1099 for payment. The IRS is getting better at matching the issuance of 1099’s, but will pay no attention to you, as the issuer. Until the requirement to match income and expenses becomes law, the writer has a valid point regarding a written off debt. The payable has a 0 value. In order to perfect that 0 debt, a Court order should be applied for. If your theory was absolute,, every bankruptcy would generate a payable for whomever purchased the bankruptcy assets, to all lienholders, which is what a bankruptcy function eliminates. Though I understand why you answered this way, an argument can be made in favor of believing the debt is no longer valid. How do I know this happens, I have had this occur many times when negotiating to pay a debt, and accounting functions do matter, good luck in enforcement, and in receiving a social security number of the debt holder. Thanks for reading.
    Be Well.

    • It is still due and payable. You have an IRS reporting requirement and a valid contract for a debt. They are two completely different things. See this article. https://getoutofdebt.org/43365/zombie-debt-1099-style-and-you-thought-your-old-debt-was-dead-lol and https://getoutofdebt.org/9005/debt-settlements-may-be-voided-and-the-money-due-anyway

      I agree it is a confusing issue and people have had differing opinions on this. Not to go on-and-on here, an argument could be made the creditor feels the debt is no longer collectible. But there is also a valid point the issuance of a 1099-C does not mean the debt is not collectible. “If a creditor has issued a 1099-C for a discharge of indebtedness, in most cases and circumstances the debt is still collectible, but there may be factors that would make the debt non-collectible, such as, but not limited to, statute of limitations and state UCC law. A creditor should seek the advice of counsel before beginning collections on a debt where a 1099-C has been issued.” – http://www.weltman.com/?t=40&an=40559&format=xml&p=7734

      “The Internal Revenue Service does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection. Section 1.6050P-1(a) of the regulations provides that, solely for purposes of reporting cancellation of indebtedness, a discharge of indebtedness is deemed to occur when an identifiable event occurs whether or not an actual discharge of indebtedness has occurred on or before the date of the identifiable event.” – https://www.forbes.com/sites/peterjreilly/2013/05/20/bank-cannot-issue-1099-c-and-subsequently-try-to-collect/#7c72fd739478

      When researching this issue you need to pay attention to debts that were not later included in bankruptcy, which absolutely terminates the debt and also keep in mind that a 1099-C can be issued without a legal termination requirement.

      The safest course of action here would be not to assume either position and to get legal help from a lawyer licensed in your state who can give you an opinion regarding a specific situation. What has been found to be unreasonable in one court is not consistent with other findings.

      Keep in mind that until recently, the IRS required a 1099-C to be issued after 36 months of non-payment. That’s a tax reporting requirement and when the Statute of Limitations is longer than three years, it is very possible to have a legal debt and mandatory reporting. It wasn’t until just recently that the IRS issued new guidance that now says, “The Treasury Department and the IRS agreed that information reporting under section 6050P should generally coincide with the actual discharge of a debt. Because reporting under the 36-month rule may not reflect a discharge of indebtedness, a debtor may conclude that the debtor has taxable income even though the creditor has not discharged the debt and continues to pursue collection.” – https://www.irs.gov/irb/2016-48_IRB/ar06.html

  • I understand the debt could be collected. But would this clear the mark from the credit report for any amount of time?

    • Only for the time that it is not reported by the agency but these often get reported again. The debt should be reported for seven years from the start of either the last time is became delinquent or since the last payment.

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