Do I Still Owe a Debt if I Receive a 1099-C?

When a debt is settled or forgiven by a creditor, it is common for the creditor to issue a 1099-C for the amount of the "forgiven" debt (e.g., the amount saved in a settlement with a creditor).  When a consumer receives a 1099-C, they may have to pay taxes on that amount as if it were income (see our other posts on avoiding paying these taxes).  

Sometimes, creditors will issue a 1099-C when a debt has not been settled.  This raises the question, does a consumer still owe a debt after a creditor issues a 1099-C?  Unfortunately, that answer is not clear but a court in California recently addressed that question.  The opinion of the California court is not binding on Colorado courts, but it gives us insight into how courts view this issue. 

In Gugger v. USAA Fed. Sav. Bank (US District Court for the Southern District of California), a consumer (Gugger) received a 1099-C for a debt he owed to USAA Federal Savings Bank (USAA).  Gugger later discovered that USAA was reporting the debt as due and owing to the credit bureaus and filed a suit alleging, in part, that the debt was discharged once the 1099-C was issued. USAA argued that the IRS Code requires creditors to file a 1099-C, even when the debt is not cancelled and asked the court to dismiss Gugger's claims because the 1099-C was not evidence of a discharged debt.

The court in Gugger acknowledged that courts around the country are split on whether a 1099-C discharges the underlying debt. The court pointed to some decisions finding that a 1099-C alone was not sufficient evidence that the underlying debt was discharged. E.g., FDIC v. Cashion, 720 F.3d 169, 179 (4th Cir. 2013).  Other courts have said the exact opposite, that the issuance of a 1099-C does reflect a discharge of the debt.  E.g,, In re Reed, 492 B.R. 261, 273 (Bankr. E.D. Tenn. 2013). 

Ultimately, the Gugger court denied USAA's Motion to Dismiss (i.e., the court said that Gugger would be able to proceed with his lawsuit).  The court's rationale was that a 1099-C can vary in its substance and, in the Gugger case, the creditor has put code "G" in box 6. The analysis of the various codes used on Form 1099-C is beyond the scope of this post but, in general, code "G" means there was a "[d]ecision or policy to discontinue collection." See Department of Treasury, IRS, Form 1099-C (2015)Because of this, the court said that there was some question as to whether the debt was discharged or not. 

Unfortunately, the court found other reasons to dismiss Gugger's case (unrelated to the 1099-C issue addressed here) and the court never gave an answer on whether the 1099-C meant the debt was discharged.  

Given the split among courts as to the effect of a 1099-C, consumers cannot assume that a debt goes away after they receive a 1099-C.  If you are facing collections from a creditor who has issued a 1099-C, call us or another experienced consumer law attorney who can look at the specifics of your case and advise as to the status of your debt.