What to Do When Debt Collectors Play Dumb

Getting a call from a debt collector is never pleasant. But Credit.com reader Sara Shannon is getting a double threat. Not only is a collections agency threatening her with a lawsuit, it also plans to sick the IRS on Shannon’s disabled, 84-year-old mother.

“He is threatening to file a 1099-C and said the IRS will be suing my mother,” a reader using the screen name “Sarah Shannon” wrote in a comment to the Credit.com blog earlier this month.

For those not familiar, the 1099-C is an IRS tax form. It is used when lenders forgive or discharge debts, because the IRS treats such forgiveness as bonus income, and taxes the forgiven principal accordingly. Any surprise tax bill would pose a big problem for Shannon’s mother, who “doesn’t even file taxes due to the amount she receives from Social Security,” Shannon writes.

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But certain details about the debt make the collector’s threats appear questionable. First, Shannon writes the debt, incurred on a Bank of America credit card, was discharged in 2004. That’s a long time ago. Depending on the state where Shannon’s mother lives, the statute of limitations on the debt has almost certainly expired, says Gerri Detweiler, Credit.com’s consumer credit expert.

Which means the attorney may not have the right to collect the debt in the first place.

“The statute of limitations for most consumer debts runs between four and six years,” Detweiler says. “After that time, debt collectors in most states can’t successfully sue to collect the debt, in some states they can’t even try to collect it.”

The second questionable practice involves the threat to get the IRS involved. According to IRS rules, lenders and debt collectors must file a 1099-C within three years of a debt getting forgiven, Detweiler says.

In this case, the collections agent missed the deadline by five years.

“There’s a good chance this collection agency is pushing the envelope here,” says Detweiler. “It sounds to me like this law firm could be making illegal threats.”

Years ago, debt collectors rarely threatened to file 1099-Cs. Then the foreclosure crisis hit. Now that over 1 million homes are caught somewhere in the foreclosure process, according to RealtyTrac, many Americans have become familiar with the once-obscure form, as they come to face whopping tax bills on forgiven mortgage debt.

The tax form makes the perfect cudgel because it is so famously complex, Detwiler says, and because it carries the power of the IRS. But at least in Shannon’s case, the threat appears to be empty.

“The 1099-C seems to be the threat du jour right now,” Detwiler says. “Maybe they can’t threaten to sue, but they use this because it’s a cloudy thing to bully people into paying old debts that may no longer be collectible.”

In the end, Shannon’s question is simple: “Is this something I need to worry about?”

Detweiler’s answer: Probably not. Here are some steps that Shannon can take to protect herself just in case, and hopefully make this aggressive debt collector go away.

1. Get it in Writing. Under the Fair Debt Collection Practices Act, Shannon has the right to request documentation of any debt. She should demand it on paper, not by email. If the attorney in this case knows he is breaking the law by threatening IRS action, forcing him to put it in writing may be enough to stop the phone calls.

2. Families Don’t Count. Unless Shannon was a co-signer on her mother’s credit card, the debt collector is barred by law from discussing her mother’s debt with her. And once the collector makes contact with Shannon’s mom, all contact with Shannon must stop, as we covered in this recent story.

3. Learn your Rights. For more in-depth information about how to protect yourself from overzealous debt collectors, see Credit.com’s detailed summary of consumer rights.

4. Report Them. If the calls don’t stop, Shannon can report the collector to the Consumer Financial Protection Bureau, her state’s attorney general’s office and the Better Business Bureau. Sometimes even making the threat to report calls to the authorities is enough to make them stop.

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Image: Sh4rp_i, via Flickr