BY MIKE HALES
The issuance of IRS Form 1099-C “Cancellation of Debt” by credit unions has been the subject of controversy for several years. In December 1996, the Treasury Department and IRS issued final regulations requiring the issuance of a Form 1099-C upon the occurrence of an “identifiable event” and listed eight identifiable events that would trigger the obligation: (1) a discharge of indebtedness under the Bankruptcy Code; (2) a cancellation or extinguishment of an indebtedness that renders the debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court…; (3) a cancellation or extinguishment of an indebtedness upon the expiration of the statute of limitations for collection…; (4) a cancellation or extinguishment of an indebtedness pursuant to an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor’s right to pursue collection of the indebtedness; (5) a cancellation or extinguishment of an indebtedness that renders a debt unenforceable pursuant to a probate or similar proceeding; (6) a discharge of indebtedness pursuant to an agreement between an applicable entity and a debtor to discharge indebtedness at less than full consideration; (7) a discharge of indebtedness pursuant to a decision by the creditor or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt; and (8) the expiration of a 36-month non-payment testing period.
Historically, many credit unions have filed a Form 1099-C under the impression that the passage of 36 months without payment renders the debt uncollectable. The IRS instructions have, at best, been vague and ambiguous:
“8. The expiration of non-payment testing period. The event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31, plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under the state or local law. Enter “H” in box 6 to report this identifiable event…The creditor can rebut the occurrence of this identifiable event if: (a) a creditor (or third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31, or (b) facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not cancelled. Significant bona fide collection activity does not include nominal or ministerial collection action, such as an automated mailing. Facts and circumstances indicating that debt was not cancelled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the creditor.”
Does a 1099-C cancel a debt obligation? If a credit union issues a 1099-C is it barred from future collection efforts?