![]() ![]() ![]() A lender’s defined policy includes both written policies and established business practices. Lenders that charge off a debt trigger issuance of the 1099-C when their defined policy leads the lender to discontinue collection activity and discharge a debt. CHARGED OFF AS BAD DEBT FULLThe identifiable events that require a creditor to issue a 1099-C include any discharge, cancellation or extinguishment of a debt that occurs by reason of (A) bankruptcy (B) receivership, foreclosure, or similar proceeding (C) the expiration of the statute of limitations for collection of the debt (D) the election of foreclosure remedies by a creditor (E) pursuant to a probate or similar proceeding (F) a settlement for less than the full amount owed or (G) the application of a defined policy of the creditor, to discontinue collection activity and discharge debt. ![]() In its broadest sense, a 1099-C is an information tax return that banks, credit unions and other commercial lenders must provide debtors after an identifiable event causes the creditor to have to discharge an indebtedness of at least $600. However, Florida courts have held that charged off debt is not forgiven, as may still be pursued for debt recovery and satisfaction. As a result, a loan that is charged off is written off and deemed a loss of principal and interest. “Charging off” a debt refers to a mechanism whereby banks, credit unions, or other creditors determine that a debt is unlikely to be repaid by the borrower and, therefore, cannot be collected. This blog post examines whether a lender is permitted to pursue debt collection even though the debt has been charged off and a 1099-C has been issued to the defaulted borrower. If a bank or credit union charges off an uncollectable debt, the lender will likely issue a 1099-C tax form to the debtor and receive a corresponding tax deduction for the uncollectable amount. At the same time, however, the account owner/debtor is still responsible for the balance, and the lender/creditor can still make an effort to collect what is owed, with obvious exceptions being discharged or dischargeable bankruptcy filings. Generally, if debtors owe a debt to a lender, and the lender cancels or forgives that debt for less than its full amount, the debtor is treated for income tax purposes as having income and may have to pay tax on this income by virtue of a 1099-C filing from the lender. ![]() Once that conclusion is made certain regulatory filings are required to document the charge-off depicting a high probability of loss. When a lender declares an account charged off, the account has become so delinquent that it is considered to be a loss, and it is written off the creditor’s books for regulatory or taxation purposes. The first consideration that lenders (banks and credit unions alike) often face is when, and if, to conclude that the account owner does not intend to, or is not able to, clear the negative balance or loan deficiency. When account owners have an account that reflects a negative balance, the lender is faced with a myriad of options and obligations with regard to the pursuit of that debt.
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