As with many aspects of credit and credit repair, this issue is a bit of a mystery.
Here's the scenario:
You have an account that has gone bad. Call it a Chase Credit Card. Because life happens, you find that you were unable to keep up with the payments on this card and eventually, it is 'charged off' by chase, which means they are closing the account, even though there is an unpaid balance.
Then, as time goes by, we get back on our feet, which ALWAYS happens because we don't give up. You receive one of these in the mail:
It is a 1099-c Cancellation of Debt, which I am just now noticing that the form is spelled 'From', but I didn't take this image, I just got it off the internet. (nice going internet)
Anyways, so you received this form and typically have to pay taxes on the 'cancelled debt', because it is recorded as income from Chase to you. I have my issues with this concept, because I would think there would need to be a judgment awarded proving the debt is valid before this happens, but that's a different story.
So, you pay taxes on this debt. What happens next? How does it report on the credit report??
One would think, since it is a 'Cancellation of Debt', that in fact there would not be a balance on the credit report. It does not seem right that you would receive a form from the credit stating they are cancelling the debt, that you would pay taxes on it, and yet it can still report on your credit??
Well, no one really knows. There have been several cases brought before the courts asking this very question.
The IRS has made statements explaining to some degree that even though you paid taxes and the debt is cancelled: " In Information Letter 2005-0207,
the IRS explained: "The Internal Revenue Service does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.""
Additionally, there have been several cases brought with mixed results and can be reviewed here, which is a great summary on the question:
Summary of 1099-c
So, clear as mud right?
Well my friends, this is the nature of our business. There is very little black and white, and a great deal of gray.
The Credit World and the laws that protect consumers and govern the bureaus and creditors are still being fleshed out.
Remember friends, it was not so long ago that Credit Reports actually were not available to consumers. They were 'little black books' that were shared between creditors only. It wasn't until the government realized the reports were wrought with errors that consumers had more rights in terms of reviewing and correcting those errors.
I wish this was a more clear article for you. The unfortunate part of being in a changing industry is that well, things change.
Ed-Jack Dvorak is National Affiliate Liaison at Credit Dr., a national credit restoration company. He works with clients and creditors to improve credit profiles.