Well you have an issue on your hands. If the debt was actually cancelled then you should claim the difference between the principal of the loan balance and the FMV of the lift as income on line 21 of form 1040. If the debt was not cancelled then the collection agency does have the right to go after the business to collect the debt. However, if you surrendered the lift with a fmv of $1,600 they should only be able to collect the $1,984.46 plus interest. The key is you need to determine if the debt was actually cancelled. This can be done by contacting a credit bureau or going back to the company that repoed the lift. I have attached a copy of the 1099-A the instuctions are on page for related to you the borrower. It explains that the debt must be cancelled for you to report the income. To answer your question, it is legal for them to still try to collect the balance of the loan even after they took the lift back.