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     | Thursday, February 10, 2000 - 06:07 am  Is this a new ploy by collection agencies? My daughter is a college student and had a checking account closed because of overdrafts. The overdrafts were fees the bank charged for bounced checks. She got a letter this week from National Revenue Corporation saying that they were going to issue a 1099 for the amount due as income. I just found out the account was turned over to a collection agency, after calling the bank to find out the exact amount due so I could pay it. How can bank fees be income??
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| | Thursday, February 10, 2000 - 08:12 am I spoke to a CPA today who advised me that it is completely legal as an accounting practice for a creditor to consider the forgiveness of a debt to be the debtor's income. I asked if there are any exceptions besides the insolvency exception and he is unaware of any. I will ask other CPAs and suggest that you do the same.
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| | Thursday, February 10, 2000 - 10:01 am If a collection agency "forgives" a debt, then it is considered income. If they submit a 1099, they are giving up the chance to collect the full amount (they can't claim that the debt is "forgiven" and still try to collect for it). If they submit a 1099, then they will only be able to recover a relatively small percentage of the amount in the form of a tax write off. Since the collection process appears to be in the initial stages, the threat of filing a 1099 is probably just a ploy as you suggested. This is what I would do if I were in this situation (It may or may not be what you decide to do, but I hope it helps give you some ideas): Send a letter to the collection agency agreeing to pay the amount in full on the following condition: That they send a letter on company stationery stating that they will transfer ownership of the debt to you and agree not to discuss the details or existence of this debt with anyone at any time under any circumstances, effective immediately upon receipt of your payment. Once you receive the letter, then you will pay the full amount. This would be a win-win situation because the collection agency would receive the full amount instead of just a percentage and your daughter could keep the derogatory information off of her credit report [If they haven't reported it yet, they can't do so if they accept the agreement. If they have already reported it, your daughter can dispute it with the credit bureaus. The collection agency can not verify the debt if they accept the agreement, so the bureaus will have to remove it from your credit report]. If the collection agency will not accept the agreement, then I would try again. I would send a letter stating the following: "I find it difficult to understand why you are more concerned with damaging a person's credit rating than you are with making money. You are giving up the opportunity to collect the full amount simply because you feel the need to punish your debtors by reporting information the law does not require you to report. This is not a wise business decision on your part. If you choose not to accept my offer, the alternative is to file the 1099 and receive only a small percentage of the debt in the form of a tax write off. My offer still stands and you still have the opportunity to receive the full amount. If you would like to receive payment in full, all you need to do is send a letter on company stationery stating that you are transferring ownership of the debt to me and agree not to discuss the details or existence of this debt with anyone for any reason at any time, effective immediately upon receipt of payment. You don't make any money from reporting derogatory credit information, so it is not practical to decline my offer of payment in full." If the collection agency still refuses to accept the offer then you could either let them file the 1099 or pay the debt anyway. If you pay the debt without the agreement to transfer ownership of the debt to you, it would appear as a "paid collection" on your daughter's credit report. If they submit the 1099, your daughter would have to report the amount as income on her next tax return and the debt would appear as a "collection agency charge off" on her credit report. She would only have to pay a percentage of the debt as income tax, but a collection agency charge off is worse than a paid collection. I hope this helps.
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| | Thursday, February 10, 2000 - 11:45 am I know that a number of people have suggested that the 1099 threat is an urban myth. But IF, as Barbara says, the filing of a 1099 is a condition precedent before the creditor is allowed to claim that accounting loss, and thereby offset their income, then it seems likely that creditors would not pass up the opportunity to reduce their own tax liability. Does not sound like a myth. Here is something to at least consider. We all know that a collections appearing the daughter's credit report would be bad. But how much would it actually reduce the FICO score? And even if the FICO score is dramatically reduced, how much of an ACTUAL cost will that have. What I mean is that I ASSUME that the amount of damage done by a collections account will reduce as time passes. Wouldn't a 5 yr old collections hurt less than a 1 yr old collections? And if your daughter will not ACTUALLY be using her credit for several years, then you have to measure the damage done at the point that she will be using it. So when is she planning on buying a car, home, or otherwise using her credit? If you anticipate that the damage done to her credit might cost her $1,000 in finance charges on a car loan, then it might be worth while to pay $999 to satisfy the collections. But if it costs $2,000 to satisfy the collections in full, and you would only lose $1,000 in actual damages if you left it alone, then you might consider ignoring it until it drops off the credit report on its own. Of course, you must factor in the tax liability she will incur by having her income increase. Will her bracket change? I know that this muddies the waters, but it is only a thought.
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| | Thursday, February 10, 2000 - 01:52 pm I settled with Citibank last year, and they filed a 1099. If the creditor "canceled" the debt after settlement and considered the remaining balance as "earned income" (1099), they can not report it as a "charge off". They may report it as a "paid collection account" or "settled in full."
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| | Thursday, February 10, 2000 - 02:50 pm What is the definition of a charge off?
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| | Thursday, February 10, 2000 - 03:13 pm So apparently it is not an urban myth. (Though even if you said it was, I still would not flash my high beams at another car.) Earnest. Maybe I'm getting a little confused. Could you elaborate a little more? I'm not sure how that bears on John's problem. I don't know if John can have the original creditor assign its interest in his daughter's debt to him. I seem to remember someone on this board saying that this might not work for some reason. Anyone remember where that was? But if John can purchase the debt for 100 cents on the dollar, then there would not be any portion of the debt that was "cancelled". So nothing could be reported as a forgiveness and earned income for the daughter. There would be no 1099. My question in that scenario is whether it is worth it. I cannot challenge whether the proposed strategy would work. I have no experience with it and have never previously read about it. But if it works, is it worth it when you consider the relative costs? It depends on the situation, right? John has to decide whether it is good or bad for him, or rather his daughter. It is even possible that the overdraft and collections would not show on a credit report, and therefore not hurt the daughter's credit. I know that it could and should show, but anything goes with credit reporting. I can't remember the last time that I saw an overdraft listed. I thought that banks had their own separate credit reporting system to keep track of bad risks. That's why some people have difficulty getting a bank account after overdrafts. It is not because the bank pulled a credit report and dropped your score with an inquiry. At least I never remember authorizing a bank to do so, and I've had a dozen bank accounts. And I don't remember a bank ever showing as an inquiry unless it was for a credit card or loan. But again, I don't recall where I read that banks have their own system. It was NOT on this board. Of course the collections might show on a credit report. So a sub-issue for me is whether IN PRACTICE bank overdrafts and their collection agencies make a habit of posting on the credit reports. If they do NOT show on the credit report, then I think and opine that John should not purchase the debt in full. It would be cheaper to just accept the income and pay tax on it. There are so many IFs and I WONDERs to my post. Obviously I'm not so much helping as asking for help.
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| | Friday, February 11, 2000 - 09:26 am So be forewarned. ALWAYS include a clause that prohibits 1099'ing of the balance (either explicitly, or by "buying" the debt, or by agreeing that the creditor "corrects the erroneous balance" down to the agreed sum). Voig suggests that if a collector is in the 28% tax bracket, meaning he could "write off" a $ 1000 "bad debt" and deduct it, saving $ 280 in taxes, then he would be CRAZY to accept as much as $ 279 to settle it. If that is true, than a debt's market value would never be below the owner's marginal tax rate. Even a debt that is 6 years 11 months 29 days old should still not be settled for "less" than the 28%?
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| | Friday, February 11, 2000 - 10:35 am Earnest- What was the dollar amount on the 1099 Citybank issued to the IRS? And, what taxable year is the "income" reported on... the year the debt became due, or the year Citybank filed the 1099?
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| | Friday, February 11, 2000 - 12:07 pm Voightkampf: I didn't realize that what I said could be interpreted to mean that "the filing of a 1099 is a condition precedent" before the creditor is allowed to write off a debt. That isn't what I meant. Wouldn't creditors and collectors pass up the opportunity to reduce their own tax liability if there is a good chance of recovering the debt? If you had the choice between receiving $200 and writing $200 off of your taxes, wouldn't you take the cash? If I remember correctly, the problem mentioned earlier on the board about transferring ownership of the debt was that the new owner can not report information about the debt to the credit bureaus unless s/he has an account with them. That would not be an obstacle to what I suggested as a possible strategy. The following would still apply: If the collection agency formally agrees not to report any information about the debt to anyone, then it can't report or verify the debt to the credit bureaus. So, if the consumer disputes the information, it can't be verified and will be deleted. Another problem mentioned in the earlier discussion is the claim that it is illegal to dispute accurate information. (Could this be an urban myth? I just read through the entire text of the FCRA and didn't find it there. Are you aware of any laws against it?) You are right. Banks have a separate reporting system and they don't report overdrafts to the CRA's. But when it falls into the hands of a collection agency it can be reported to the CRA's as a collection account. I don't know how frequently this occurs, but I don't think I would want to chance it. It could happen often, or hardly ever. Do collection agencies differentiate between types of accounts when it comes to reporting them to the bureaus (e.g., reporting credit card debt but not reporting debts from checking accounts)? I agree with you that it all depends on the particulars of the situation. Unfortunately, when someone posts a question on this board, we usually don't have all of the specific details at hand. What is the best way to handle this? Should we make due with the information provided or is it best to put forth a list of questions to be answered before we offer any suggestions or ideas?
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| | Friday, February 11, 2000 - 12:30 pm Hi, Does anyone know if there is a statute of limitations regarding the filing of a 1099? And, to above: If it were in fact illegal to "dispute accurate information" I think a law as such would be totally unenforceable.
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| | Friday, February 11, 2000 - 12:34 pm Voigtkampff: Anyone can download IRS forms and directions for filling them out from the IRS website. For your convenience I have already downloaded the PDF Format 1099 instructions for 2000. It is required that a 1099C be issued whenever a debt is forgiven or cancelled. No contractual clause can override the laws of the United States and any clause mandating that a creditor not file a 1099C form would be unenforceable. I am not an accountant so some of the information I present after here may not be 100 percent correct. Bear with me, and if you need the services of an accountant then you should retain one. Many businesses tax records are handled on a "cash basis" and some are even required to be accounted for on a cash basis by law. Real estate rental accounting is required to be on a cash basis. That means that if you are prepaid the January 2000 rent on 12/20/99 and you deposit it into your bank on 12/28/99 even though it's for rent in the year 2000 you must consider it income for 1999 because you received the cash in 1999. This double-edged sword also permits landlords to pay their 2000 property taxes in December 1999 and take it as an expense, so don't feel too bad for them. On the other hand banks operate on an accrual system. Interest accrues to your account and taxes must be paid on that interest that accrued in 1999 even if it isn't collected until 2000. In this way Uncle Sam gets his money as quickly as possible regardless who you are and how you get paid. Expenses are also accrued and this is entered into an accounting system with a debit and a credit. An expense gets debited while a liability(accounts payable) in the same amount is credited. In this way the balance sheet always stays in balance. Similarly when income accrues an asset(accounts receivable) is debited and income is credited. When a payor fails to make a specific number of payments (often 6 payments or 180 days delinquent) a company should consider the debt to be worth less because it's less likely that they'll collect the full amount. Accordingly they do an accounting procedure called "writing off" or "charging off" a debt. This has a slightly different meaning than what we mean when we see a "charge off" notation in a person's credit file. This creates or increases an expense (debited) while the asset(notes payable) is reduced (credited). In this way the bank has reduced their tax liability. No form 1099-C will be issued at this time. Let's also say that they contact an outside collection agency at that time and place the item for collection. The debtor will most likely mark the account as a collection or a charge off at this time. Also the collection agency is likely to create an entry on the payor's credit profile showing a collection account. Two years go by and this collection agency (which gets 40 percent of what it collects) has collected nothing. The company policy of the original debtor (who is still the note holder and owner) at this time recommends assigning (selling) the debt to a third party. The debt (previously charged down to let's say 35 cents on the dollar) will be re-charged off to however much the third party is willing to pay. Let's say it's sold for 15 cents on the dollar. At this point the payor is likely to end up with another derogatory entry on their credit profile from the new collection agency. The new agency tries to collect for 2 years without luck then they make their final threat. Either pay or get 1099'd. At this point let's assume the payor is in a 28 percent tax bracket. That means the most damage a payor could take from a 1099C is 28 cents on the dollar (unless the debt will push them into a higher bracket ... unlikely). Any offer to settle, therefore, should be less than 28 cents on the dollar not more. Also note from the new collection agency's point of view they only have 15 cents on the dollar (what they paid) invested in the debt. That's also the amount of the tax write-off they'll get. It's not impossible (or even uncommon) for a collection agency to issue a $1,000 1099C and get a $150 tax write-off for it. Let's assume the payor does not pay and the new collection agency makes good on their threat. They will issue the 1099C. At this point they should (but I'm betting a lot are careless on this regard) re-markup the payor's credit profile putting their collection notation at least showing $0 balance owing and, in my opinion, should mark it as a paid collection since the debt has been forgiven/cancelled. Note also that, as you have already pointed out, taxes might not be owed on that 1099-C if, for example, the taxpayer is insolvent. Decisions on the insolvency (or lack of same) of any payor will be made in a tax court of the United States. Whether the taxpayer is insolvent or not has no bearing on whether or not the holder-in-due-course should file the 1099C form. They should always file. The goal of a person trying to settle a debt and avoid IRS consequences should not be to prevent filing a 1099C but to gain a defense (such as gift, bankruptcy, insolvency, etc.) that will be considered valid by an IRS tax court. I know this entry has been long. I've tried to be as complete and as accurate as possible. My post here does not mean I plan to start up posting again. I'd appreciate getting your email address or contact information so I can drop you a line or make a phone call to you. Your expertise and willingness to share on bankruptcy laws is quite valuable. Perhaps we could work out an arrangement to barter information. Let me know. ************************************************** Nothing in the preceeding should be considered legal or tax advice. The poster does not represent himself as a lawyer or a certified tax preparation specialist. No warranty either express or implied comes with this information including, but not limited to, fitness for any specific purpose.
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| | Friday, February 11, 2000 - 01:00 pm Maybe an agreement saying the creditor "will not report via 1099" is not enforceable, but you could put in an agreement that you both agree that the debt is $x (the amount you want to pay) and the creditor agrees to "correct" the debt "down" to that figure.
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| | Friday, February 11, 2000 - 02:09 pm Sean, Welcome back! Keep on posting!
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| | Friday, February 11, 2000 - 04:47 pm Sean, who mentioned a contractual agreement whereby the collector agrees not to file a 1099?
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| | Saturday, February 12, 2000 - 07:32 am Barbara, sorry if I misconstrued. I was referring to your language that a 1099 would be submitted before the creditor could recover a small percentage as a tax writeoff. Though Sean's post seems to confirm that a 1099 is a condition precedent before the creditor is allowed to claim an offsetting tax loss with the IRS. Seems like it is actually the vehicle for doing so. Wouldn't it be embarrassing if I mis-read Sean also. It definitely makes sense that I would prefer $200 in cash rather than save $200 in tax liability. But that is me. But a creditor might be different. I'm not saying that corporations are mad or illogical. Though sometimes they seem so tightly locked into procedure, that they do the illogical. Their rules might not allow for any variables. But in this situation, maybe I would be the irrational one to take the money. Individuals look for spontaneous gratification. Human nature. Money now! I know that corporations look for the best allocation of losses for long term benefit. Sometimes a large corporation will purchase a loser business just to offset the present income from their cash cow or anticipated future income from their star. That seems so counter-intuitive, but my professors taught that it was wise, established practice. I think that it will all depend on that corporation's accounting practices. And of course you are correct that in the absence of specific facts, we should answer in the abstract. I am just concerned because I see that in law, people will hear something and say OK that's the law. Then they apply it out of context or apply it too broadly. I was just concerned that someone could do that here, without a quick caveat. I was also inviting JOHN to give us more information so that we could quit the abstraction. It is a shame that JOHN failed to do so. As much time as Sean put into his post, I'm sure that he would have tailored it to the facts and answered the question. Sean, I have a reponse, but I need to read your post a few more times. It was too much education for me to absorb at once. Feel like I'm back in school, but a sincere thanks.
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| | Saturday, February 12, 2000 - 01:11 pm As far as the legality of disputing accurate info on a credit report, I'm not sure how that came up. This is a long thread, so I might have missed it. I thought that the FTC had taken a position against that. But I agree that it does not sound enforceable. I'm trying to find out more info on the 1099s as far as limitations, etc. I got onto a legal database that lets one search for every case that ever used a particular term. When I looked up "forgiveness" and "1099" I could not find any cases regarding credit reporting in Florida state or federal courts or in the 11th Circuit. So I'm fresh out of info. But Sean's post sounded pretty authoritative and I'm not about to challenge it.
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| | Sunday, February 13, 2000 - 04:54 pm Voightkampf: Yes, there is a credit reporting agency that is specifically for checking account applications. It is ChexSystems, a division of the blank-check printer Deluxe. It is primarily a list of list of consumers who have had checking accounts closed "for cause," and also includes specific overdraft items related to those closures. More than 80% of banks use ChexSystems. Their main competitor is TeleCheck. Some banks (such as Wells Fargo, Crestar, and some Internet-oriented banks) *do* use regular credit bureau reports for checking account applications. Deluxe has introduced a much more detailed checking-related database called the Debit Bureau. There is some background information on ChexSystems, Deluxe, etc in the *Credit Overview*---> *Credit Bureaus* section at... http://www.cardreport.com Regarding the legality of lying to credit bureaus, my understanding is that the Credit Repair Organizations Act prohibits a "credit repair" service from making false statements in bureau disputes, or advising a consumer to do so. I have also heard of one case in which someone was prosecuted for "placing false information on a credit report" (so that he could qualify for loans), although perhaps he had posed as a creditor company to submit bogus good accounts for his report. There is also likely a major difference between falsely submitting new information to facilitate a monetary-loss fraud, and the, "That account isn't mine, so remove it," type of lying by a consumer, in terms of effect, enforceability, and whether anyone would take the effort to persue it.
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