Legal Question in Credit and Debt Law in Wisconsin

Profit-Loss Writeoff of Debt, Form 1099 Income, Subsequent Collection Efforts

In recent years, many credit card companies have been quick to issue form 1099 statements of income due to debt cancelation any time they "write off" a debt. This procedure enables them to declare a loss on their books in the year in which the debt becomes uncollectable (i.e., due to a bankruptcy of the borrower). However, any income realized later on the debt (for example, if the account is sold to an investor who later tries to collect it--a likely scenario in your example), any amounts paid for the account must be declared as income by the bank. If the bank declares a debt "uncollectable" and issues the 1099 when the debt is, in actually, really still collectable (and resold to a collector), the bank may be guilty of fraudulent reporting of uncollectability to the IRS, and the IRS may be very interested in learning about potential dishonesty by a major banking corporation with "deep pockets." Whether or not you actually need to declare the amount in such a "1099" as income is also complex. The bankruptcy code, for example, contains specific tax provisions indicating that consumer debt discharged in bankruptcy is NOT taxable income. In such a scenario, your accountant would simply attach a copy of the relevant statute, along with a quick note to the IRS, to your tax return, indicating why you are properly not claiming this as income. Finally, if you have filed bankruptcy and the creditor holds your account as an "open collection" on your credit report long after the bankruptcy is closed, and then later issues the form 1099, the creditor may be guilty of several things, some of which might enable you to actually make money due to their misconduct. One of these is a violation of the bankruptcy discharge by continuing to collect a debt which has long ago been discharged. Statutes permit you to recover damages as well as actual reasonable attorney fees against such a creditor. The bank also may be guilty of defrauding its shareholders by continuing to hold such an account on their books as a valuable asset, when it is in fact worthless. As you can tell, this is complex situation. My advice to you is therefore to retain your own tax expert--a tax attorney, CPA, or IRS "Enrolled Agent." Beware of "bookkeepers" who do not possess any of these credentials--they may have once had one but lost it due to dishonesty.