Debt Settlements May Be Voided And the Money Due Anyway

A recent posting, “An IRS 1099-C Form Does Not Mean Debt is Discharged” caught my eye. It highlights a great potential risk for people that use debt settlement to eliminate their debt. The surprise is that while they think the debt settlement process has discharged their debt, it absolutely might not.

A third circuit bankruptcy case recently decided that Form 1099-C does not establish that debt is discharged. A creditor typically issues a Form 1099-C to a debtor in bankruptcy to show cancellation of debt. The credit union in the case In re Bononi, had sent the Chapter 7 debtor zero-balance account statements and an IRS form 1099-C for “cancellation of debt.” After receipt of the form and the account statements, the debtor received money from the settlement of a personal injury action.

The court found that despite the statements and the 1099-C form, the debtor still had an obligation to pay on the past debt. Additionally, the court found that even if a creditor issues a 1099-C form, the form does not prohibit the creditor from pursuing collection of the old debt. Only a discharge from the Bankruptcy Court has the effect of canceling the debt and removing the debtor’s liability for the debt. In re Bononi, 19 CBN 864. – Source

I’m still researching this issue but from what I have found so far, it is in fact, true. When a creditor writes off a debt or settles a debt, unless they agree the debt has been paid in full, satisfied, and no additional amount is due, then the part of the debt written off may be collected at a latter date.

The reason, the write off of the debt is an accounting function and the issuance of the 1099-C to the IRS is for tax purposes. The write off of the debt and issuance of the 1099-C does not erase the underlying obligation.

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This is a big deal. With creditors stressed and pressured for income, I can certainly see a creditor selling their written off debts for pennies on the dollar to generate yet more revenue from them. These would be sold to collectors that are prepared to fight the settlement offers. While the part paid in the settlement would be paid, it is the amount forgiven that could be collected.

And for all the critics that say this will never happen, my response is that it just has not happened yet in mass, but it certainly may. It’s a profit center waiting to be exploited and we all know how much banks love profits.

My bet is the most likely consumers to be hit with this will be all the people that are currently working with one of the commercial debt settlement companies that may soon go out of business. See 85% of Debt Settlement Companies May Be Closing Soon and Taking Your Money With Them. These companies will go bankrupt and the supporting documentation for any debt settled will most likely vanish with them.


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5 thoughts on “Debt Settlements May Be Voided And the Money Due Anyway”

  1. Unfortunately, what Steve was saying with the commercial settlement companies Is true they already have the funds in GCS awaiting settlement now what’s crazy is By TASC and USOBA standards the settlement company has to notify to consumer if the settlement is over 50% so no matter what any settlement under 50% they will not notify the consumer this has an increased risk of the consumer still being liable for that debt especially if the settlement company just wants the typical 10 to 15% settlement fee from the consumer. Also by that time they have already earned the 25 to 30% of fees upfront within the first half of the program so who’s real issue is it by that time? The consumers. I can tell you from working the sales floor of 2 settlement companies that this is not an issue at all for the company because (WEVE HAVE ALREADY GOT PAID) none of these companies really care about reputation and with their accreditations other the BBB who’s to say that these are the boundaries for proper business ethics. TASC and the USOBA certainly are not putting their foot down to regulate anything of this sort. I have been specifically told in the past to be as vague as possible when it comes to things like this with the consumer. The front end sales or “enrollment / debt advisor ha.ha” certainly isn’t going to say now all I need is your checking account number and oh by the way you may still be liable for the remaining debt after we settle but that not that big of a deal. They do that with the disclosure about the 1099c . this is an exact quote “ do you understand that any debt settled over $600.00 dollars may be reported to the IRS as income. But if you are found insolvent you wont have to worry about it because this isn’t that common”.

    Any who…. No one will regulate this and unfortunately all of these folks looking for help with these companies are going to lose every sent they invested when they go out of business. I hope people read this and see how deceptive these companies teach their employees to be.


  2. Never borrow. A modern approach of creating servants is trough credit. Of course, it is the spending that runs our economy, at least that we are told, but let’s not forget who actually runs the government ” it is the big business.” We are told that consumers have a duty to pay up there debt and it is true, but the same doesn’t apply for investors. When they( investors) lose money they write them off, when we the “servants ” lose jobs and cannot pay up ” IT IS BECAUSE WE ARE BAD, WE DON’T KEEP OUR PROMISE UP” what a joke.The morale of the story is “DON’T EVER BOROW MONEY.”

  3. I have a credit card debt from 10 years ago that I thought i settled years ago, but now there is a judgement against it and they are threatening to garnish my paycheck. I can’t find proof that i settled becaused I moved around quite a bit. How can i get out of this.

  4. Steve,

    You are absolutely correct in warning consumers that they need proper documentation to establish that a debt has in fact been settled and no further payment is due. This letter, on the creditor’s letterhead, with a signature, must be in the debtor’s hand before he or she sends the funds to settle the debt.

    Earlier this year I was on a radio show where a caller explained that she settled two debts over the phone, with major creditors whose names you would recognize. Within weeks both were calling looking for the rest of their money. She had nothing in writing to establish this was a settlement and not just a payment.

    I’d add that if you do settle a debt you want to keep this documentation in a file where you can find it – forever. It’s not unusual for the “forgiven” balance to end up with a debt buyer who years later is hounding the consumer for the debt.

    Thanks again for all the great advice you give consumers!


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