Home > Managing Debt > What to Do When Debt Collectors Break the Rules

Comments 2 Comments

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.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Free Tool: Credit Report CardBut 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.

[Related Article: What to Do If You Get a 1099-C for an Old 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.

[Free Resource: Check your credit score and report card for free with Credit.com]

Image: Sh4rp_i, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team