Student Loan Related

Why Am I Being Contacted for a Private Student Loan That Navient Charged Off?

Written by Steve Rhode

Question:

Dear Steve,

What does it mean Navient has Charged off my Private Student Loan as bad debt, profit and loss write-off.?

Now I am now being contacted by a collection agency.

Miriam

Answer:

Dear Miriam,

What we have here is the collision of a tax function and a debt function. When the debt was determined to be uncollectible by the original creditor they had to write it off their books as a performing asset.

The IRS requires the creditor to issue a 1099-C statement and you may have to pay income tax on the forgiven debt if you are not insolvent. You can read a lot of 1099-C articles here along with advice on how to deal with the potential resulting tax liability.

Typically when a debt is “written off” by the original creditor it will be sold, often for pennies on the dollar, to another debt owner. That new owner can attempt to collect on the debt. The performing asset write off does not invalidate the debt. Also, people attempt to collect on debts all the time that are not legally owed.

The debt may not be extinguished by the charge off.

There are issues to contemplate before you ever agree to pay the collector. For example, is this an old debt and you could raise the issue it might be too old to collect in your state. Or maybe the new debt owner does not have the correct documentation to prove you actually owe the debt.

You can certainly pursue fighting back but issues like the statute-of-limitations or time-barred-debt and even debt validation can be somewhat tricky issues if you say or do the wrong this that resets the clock on the old debt.

Different states have different laws and statutes when it comes to old debt.

There is almost no substitute for good legal advice from an attorney who is licensed to practice law in your state. A situation like this, where the debt may be substantial, would be a time to talk to an experienced attorney. One place you can find such an attorney in your state would be through this link.

READ  Which is Worse, Bankruptcy or a Write Off? - Jenny

The biggest mistake you could make is to do nothing or become pissed off over this situation.

These situations are completely frustrating, confusing, tricky, and benefit from some expertise to avoid making an expensive mistake. A little proactive dealing with this situation with a professional will be well worth it.

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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.

5 Comments

  • Thank you, Alot of great information as always. I see both arguments, but as an advocate for the consumer I am always leaning on the side of the consumer. Most of the arguments that lean towards the creditor in my opinion are more relatable towards politics, if you look at it hard none of it makes any sense, and it seems like a common sense approach could solve all the issues.

    As you suggested, I would also recommend that Mariam seeks legal counsel, one that specializes in these types of matters, possibly one that specializes in FDCPA violations.

    My final though, and in my opinion its a common sense way of looking at it.

    Mariam received a 1099C and filed it with her 2018 taxes, and due to this owed a large debt to the government for the income from the 1099C. This debt in my opinion and common sense would say its no longer a debt but an income. Now later down the road a debt buyer tries collecting on the debt and is successful in getting Mariam to pay something on the old debt, is Mariam allowed to write this amount off in her taxes in future years since she already paid taxes on the original amount as an income? I am not an accountant but I dont think the IRS would allow this, making this a huge issue hurting consumers, ultimately putting struggling Americans in a worse financial situation than when they started due solely to the collection activity on an unsecured credit account.

    • As a technical point, we actually don’t know for certain she received a 1099-C. She says her debt was “charged off” and that might mean several things.

      You would be surprised what the IRS will allow. Common sense and these type of technical issues do not always play nicely together.

      I’ve been in the debt field since 1994 and I’ve seen countless people have to pay the tax on the forgiven debt and then volunteer or be persuaded to repay the debt. Historically we called it the debt tax. It might not be common, but it is a landmine for sure. This is another reason I’m a big fan of closing the door legally with bankruptcy when there is a string of unresolved debt issues. Bankruptcy provides a more definitive federal framework of how these issues are dealt with.

      Thanks for the comment.

  • I am the owner of a Debt Negotiation Company, I subscribe to Steves newsletter because there is alot of great information on here. I do have an issue with this article, this article contradicts what I have known to believe, I would like to question the author of this article. It has been my understanding and I have been in the industry for over ten years, that when a 1099C is issued and a debtor (the person that owes the money) has to calculate that amount as income on their taxes and possibly have to pay taxes on that dismissed amount that the debt can no longer be sold or collected on because the debtor has to calculate that amount as income, therefor its an income and not a debt at this point to the debtor. If this is not true please direct me to the law that states otherwise.
    Please understand that the debtor can still make a voluntary payment on the debt after a 1099C was issued, but the creditor can no longer actively collect or in my industry offer a settlement amount post 1099C. In order to make a voluntary payment the debtor has to call the creditor to do that. Some creditors, mainly Chase, will leave the amount of debt on a clients credit report, where the majority of creditors will zero out the amount on the credit report. In the many years I have been doing this I have never once had a creditor sell a debt after a 1099C was issued or even pursue any collection activity.
    Thank you Steve for your hard work in getting so much information out about the debt industry, I look forward to hearing back about this topic.

    • Thank you so much for your comment and for being a reader. This is a topic that exists in limbo without a great answer. I’m honored you posted the comment and we get to discuss this issue.

      We’ve got a couple of big issues to deal with here. The fact the creditor sold the charged off debt can indicate they felt the debt was still collectible and the debt buyer felt it was as well. At the very least charged off debt is sold and some new owners are willing to take a chance can accidentally get a consumer to pay. I’ve seen a lot of that over the years. It’s like attempting to collect on time-barred debt. I’m always surprised how many consumers wind up repaying debt through a debt relief program that is out of stat and it just restarts the statute of limitations clock. Oops.

      Holding fast to a concrete position the debt is not collectible and has died a permanent death is a position I’m not comfortable taking and here is why. No clear definitive answer exists and arguments are made on both sides.

      But first, because of the unresolved nature of this very specific issue, you will see I suggest the reader should consult with an attorney for a definitive legal opinion.

      “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/

      And yet an argument can be made that the 1099-C does or should indicate the debt is dead. That article linked above makes that argument.

      There is this in an unpublished opinion, “In their brief, the Walkers concede that the Form 1099–C does not say that the creditor actually canceled the debt.” https://www.govinfo.gov/content/pkg/USCOURTS-njd-2_16-cv-09157/pdf/USCOURTS-njd-2_16-cv-09157-0.pdf

      But here are a host of other resources on the subject.

      https://getoutofdebt.org/43365/zombie-debt-1099-style-and-you-thought-your-old-debt-was-dead-lol by Attorney Greg Fitzgerald.

      http://www.parkertaxpublishing.com/public/Form_1099C_Dissolve_Debt_Bankruptcy_Court_Parts_Ways_with_Other_Courts.html

      “As an initial matter, a number of courts have held that “[t]he issuance of a Form 1099-C does not, alone, operate to extinguish a debt.” Atchison v. Hiway Fed. Credit Union, 2013 WL 1175020, at *3, 2013 U.S. Dist. LEXIS 38532, at *8 (D. Minn. Mar. 20, 2013); see also FDIC v. Cashion, 2012 WL 1098619, at *7, 2012 U.S. Dist. LEXIS 45843, at *19 (W.D.N.C. Apr. 2, 2012) (“[A] Form 1099-C [which “is issued to comply with IRS reporting requirements”] does not itself operate to legally discharge a debtor’s liability.”); Carrington Mortg. Servs., Inc. v. Riley, 478 B.R. 736, 744 (Bankr. D.S.C. 2012) (stating that the debtors’ credit report and Form 1099-C received from the lender were “not dispositive, and there is no evidence that the note has been satisfied.”); In re Sarno, 463 B.R. 163, 168 (Bankr. D. Mass. 2011) (“It is apparent . . . that a form 1099-C is ‘informational’ and that it must be filed ‘whether or not an actual discharge of indebtedness has occurred.’”) (citations omitted). In fact, the United States District Court for the Eastern District of Tennessee has stated that “a Form 1099-C, as a matter of law, does not operate to legally discharge a debtor from liability on a claim that is described in the form.” United States v. Reed, 2010 WL 3656001, at *2, 2010 U.S. Dist. LEXIS 96079 at *5 (E.D. Tenn. Sept. 14, 2010).” “This court agrees with the United States District Court’s decision in Reed and with the other courts holding that the issuance of a 1099-C by a financial institution does not, as a matter of law, operate to extinguish an indebtedness. Instead, the court determines that the issuance of a Form 1099-C reflects that a financial institution has, in accordance with 26 U.S.C. § 6050P and 26 C.F.R. § 1.6050P-1, discharged an indebtedness, which must then be reported by the debtor as taxable income.” http://www.tneb.uscourts.gov/sites/default/files/05-14-2013_william_and_debbie_reed_12-30049.pdf

      And there is https://getoutofdebt.org/9005/debt-settlements-may-be-voided-and-the-money-due-anyway

      But then there are plenty of positions on the other side like this one. https://www.severson.com/consumer-finance/district-court-cal-says-issuance-1099-c-might-discharged-debt-making-reporting-debt-inaccurate/

      I guess what I’m humbly attempting to offer is that this topic is not as black and white as everyone hopes it is. In cases like this, I prefer consumers know the potential risk and seek a definitive opinion on a case-by-case basis.

      But you know, this niche area is as problematic as trying to get incorrect 1099-C forms corrected years after issuance. It still blows my mind there is no IRS form to deal with that issue.

      Finally, we really can’t tell if the debt was “charged-off” or a 1099-C was issued from the reader’s information so I erred on the side of caution.

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