Another case of “tax consequence”, another decision

On May 5, 2017, a U.S. federal judge in Wisconsin dismissed a putative Fair Debt Collection Practices Act (FDCPA) class action lawsuit regarding 1099 (c) language in a settlement letter. The case is Dunbar v. Kohn Law Firm SC (Case No. 17-cv-88, US District Court, ED, WI).

A copy of the court decision and order is available here.


On January 29, 2016, Kohn Law Firm SC (Kohn) sent the Plaintiff, Mary Dunbar, a Debt Collection Letter on behalf of Midland Funding LLC. The letter stated that the amount owed was $ 4,049.08, but proposed to settle the debt for $ 2,631.90. The letter also stated: “NOTICE: This regulation may have tax consequences”.

Dunbar filed a complaint on January 19, 2017, alleging violations of the FDCPA. According to Dunbar’s complaint: “Referring to tax consequences in a collection letter is intimidating and misleading, suggesting to the uninformed consumer that failure to pay the debt will lead to problems with the Internal Revenue Service (IRS). She claimed that this suggests that, “[u]Unless the consumer pays the full amount that the defendant claims to be owed on the alleged debt, the consumer could be reported to the IRS “and”[u]Unless the consumer pays the full amount that the letter claims is owed for the debt, the consumer will have to pay taxes on the outstanding balance. She further alleged that there are different ways under the Internal Revenue Code (IRC) by which a person can pay off a large debt without causing “tax consequences”. For example, if the debtor is insolvent, no taxable income results from the discharge. In addition, the declaration is not required of the discharge of a debt which constitutes interest or other elements other than the capital or of the release of the principal of not more than $ 600.

Dunbar alleged that the defendants “violated 15 USC §§ 1692nd, 1692nd (2) and 1692nd (10) by representing in [the letter] that “This regulation may have tax consequences”.

On February 14, 2017, the defendants in the case, Encore Capital Group Inc., Kohn Law Firm SC, Midland Credit Management Inc. and Midland Funding LLC, requested that Dunbar’s complaint be dismissed. Dunbar filed an amended complaint on March 7, 2017, and the defendants requested its dismissal on March 21, 2017.

Dunbar responded to the second motion to dismiss and the defendants responded. The court determined that the motion was ready to be resolved. All parties have consented to the full jurisdiction of a magistrate.

The opinion of the Court

Trial Judge William E. Duffin rendered the decision and order. He began his analysis with a review of the IRC’s rules on discharging or forgiving a debt. He wrote:

“The payment of a debt constitutes gross income under the Internal Revenue Code. 26 USC § 61 (a) (12). If the discharge is $ 600 or more, the discharge entity must file a 1099-C with the IRS. 26 USC § 6050P; 26 CFR § 1.6050P-1. Whether or not the creditor is required to report the discharge by means of a 1099-C, the debtor may be required to report the discharge as income.

In the amended complaint, Dunbar cited four instances where “a misrepresentation of a debtor’s rights or obligations under the Internal Revenue Code in relation to the collection of a debt has been found to be a violation of the law. FDCPA ”.

Justice Duffin found the current case to be distinct from the four cited cases. Duffin concluded:

“In each of the cases cited by Dunbar in his amended complaint, the debt collector represented something as certain to happen when it was only a possibility. In contrast, the letter sent to Dunbar stated only that a “settlement may have tax consequences[.]»Emphasis added by the court.

In reviewing the challenge regarding the tax consequences of debt forgiveness, Justice Duffing noted that there were numerous instances where debt collectors were sued under the FDCPA for not indicating that a settlement could have tax consequences. He noted:

“Given the number of collection agents who have been sued for failing to mention the potential tax consequences of a settlement, it is not surprising that some collection agents choose to mention the potential tax consequences in letters that ‘they send to debtors. As noted above, early efforts to include such language have sometimes backfired when courts found the opinions plausibly misleading because the debt collector ignored certain exceptions or chose to provide. information that an unsuspecting debtor might find misleading.

Judge Duffin was more persuaded by two recent cases where the courts have approved statements similar to the statement at issue in that case. These two cases were Everett v. Financial Recovery Services, Inc., 2016 (Case No. 16-01806, US District Court, SD Ind., November 28, 2016) and Remington v. Financial Recovery Services, Inc., 2017 (Case No.3: 16-865, US District Court, D. Conn., March 15, 2017). inside ARM written about Everett January 11, 2017 and Remington March 20, 2017.

Duffin determined:

“The defendants accurately informed Dunbar that there could be tax consequences if she settled her debt for less than the amount owed. By accepting Dunbar’s allegations in her amended complaint as true, the fact that her situation was such that she would not be aware of the tax consequences does not make the defendants’ statement misleading. The statement was worded on a contingency basis and encompassed situations where the tax consequences would be not results. As the court of Remington noted, even an uninformed debtor would not read “may” as “will”.

Rather than being plausibly intimidating, the court finds the statement more likely to be helpful. The court agrees with courts which have concluded that such a declaration is not required when proposing to settle a debt, but nevertheless concludes that a debt collector who chooses to include such a declaration does not did not violate the FDCPA. An uninformed debtor might not recognize that paying a debt is income and therefore could have tax consequences. Taxes are complicated. Without warning that a settlement could affect their taxes, a debtor might mistakenly believe that their net savings by agreeing to a settlement will be greater than they actually are.

A debtor who reads, “This settlement may have tax consequences” might reasonably have questions about what this means to them. But that is the purpose of the statement. It is intended to alert the debtor that there is an issue that they must consider when deciding whether or not to accept the proposed settlement. It is neither misleading nor misleading. The court believes that it would take a bizarre and idiosyncratic reading for even an unsuspecting debtor to conclude that, in light of some unknown potential “tax consequences”, she would be better off paying the entire debt rather than accepting the debt. proposed settlement. “

InsideARM Perspective

This case is positive for the ARM industry. But the problem is far from resolved across the country. The tax consequences of debt settlement are the classic “catch 22” for debt collectors. Mention the tax consequences and get sued. Don’t mention the tax consequences and get sued.

It would be helpful for the IRS and CFPB to come together and jointly establish rules governing the matter. From a third party perspective, perhaps the best solution would be a specific requirement that the OWNER Debt is the only entity required and authorized to make the disclosure. This would eliminate such lawsuits in the future for the pure third party debt collector.

In the past, many credit providers have required third-party agencies to make 1099 (c) disclosures in their communications with consumers. These disclosures give rise to prosecution. As noted above, the opinions of the various courts have not been consistent. For a review of several of these cases, see insideARM FDCPA Resource Pagee.

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