Legal Question in Credit and Debt Law in California

The judge ruled correctly. A 1099-C is a tax matter and accounting matter. It does not affect the actual liability on the underlying debt. Taxes are calculated on the basis of income and expenses. Making a loan is not an expense, it converts one kind of asset (cash) to another kind of asset (accounts receivable). When a loan is repaid, the principal is not income, only the interest. When a loan is not repaid, however, after reasonable efforts to collect the IRS allows the lender to convert it to a tax-deductible expense by treating it as no longer a loan, but rather as income paid to you. The 1099-C is the method the lender uses for putting you and the IRS that they are electing to treat it as an expense to them and income to you for tax and accounting purposes. That does NOT mean the debt is legally ended. All it means is that if the lender later collects anything on the loan, either by collecting from you or selling the debt to a junk debt buyer or other assignor, they must treat that as income rather than repayment. If the assignor collects from you, they also must treat it as income, less whatever they paid for the assignment.