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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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We had a credit card with Chase Bank. We defaulted on this

Customer Question

We had a credit card with Chase Bank. We defaulted on this card 6 years ago. Midland Funding purchased the debt. Chase has written this off with the IRS. Midland Funding purchased the debt for pennies but in a settlement offer, Midland wants to send us a 1099c and report the loss to the IRS too.
Is this legal for Midland to do this? It seems that it is double dipping. It will now appear on our credit report for 7 more years if we settle.
Is there a specific IRS ruling that can put a stop to Midland writing this off if they bought the debt for pennies on the dollar?
Submitted: 1 year ago.
Category: Tax
Expert:  Mark Taylor replied 1 year ago.

Hi, my name is Mark. I will be happy to help you with your questions. So have already paid tax on the cancellation of debt income. You should not have to pay tax again. It will be difficult to keep Midland Funding from issuing another 1099-C. If they do you would need to report the income. You would also report an equal offsetting amount with the description that this Cancellation of Debt was previously recognized in 2010 (or whatever year).

Customer: replied 1 year ago.
is it legal for Midland to issue a 1099-c for the full amount ($13,789) when they only paid $200 for the debt?
Expert:  Mark Taylor replied 1 year ago.

It is not illegal for Midland to issue another 1099-C. They can claim the other one was issued in error. If you reached a settlement agreement with Midland this amount should reduce the total cancellation of debt. If they do issue another 1099-C it is not taxable. You would still need to report the amount and back out the previous amount of COD income that was reported.

Expert:  Mark Taylor replied 1 year ago.

The issue has been bouncing around in the courts for the past several issue. Specifically, if a 1099-C indicates that the debt is cancelled and prohibits the credit from pursuing collection activities.