Can You Preserve Your Claims Against a Borrower After Filing a 1099-C Cancellation of Debt?

by Poyner Spruill LLP
Contact

[authors: Diane P. Furr, Lisa P. Sumner]

​Borrowers who file a bankruptcy petition are always looking for creative new challenges to claims asserted by their bank creditors.  In recent years, debtors have argued that a bank’s issuance of an Internal Revenue Code form 1099-C “Cancellation of Debt” has the effect of waiving the bank’s claims against the borrower, and should preclude the bank from having an allowed claim in the bankruptcy case.  Fortunately, some recent court opinions state that a bank’s issuance of a 1099-C does not constitute a waiver, and the bank remains entitled to enforce its claim in a subsequent bankruptcy case.

Bankruptcy courts around the country have expressed differing opinions about whether a 1099-C forgives or discharges the debtor from further liability on a debt.  For example, courts in Connecticut have said that filing a 1099-C has the effect of discharging the underlying debt.  Arizona courts have declined to state a definitive answer, whereas courts in Indiana have held that filing a 1099-C does not excuse the debt, and instead is an administrative filing made merely to meet IRS requirements.  Similarly, in a recent bankruptcy case in Pennsylvania, In re Zilka, a bankruptcy court held that filing a 1099-C does not waive the debt, operate as a release or discharge the borrower’s liability.  In addition, the bankruptcy court in Zilka held that the lender’s issuance of a written statement to the borrower citing the outstanding loan balance as $0.00 due to a “charge off” only reflected the bank’s internal accounting procedure and was not an admission that the loan balance was forgiven.

A recent North Carolina decision follows the Pennsylvania bankruptcy court’s reasoning in Zilka.  In FDIC as receiver for Bank of Asheville v. Cashion, the United States District Court for the Western District of North Carolina rejected the debtor’s argument that the note was cancelled when the bank filed a 1099-C.  Citing Zilka, the North Carolina court held that the 1099-C did not operate to discharge the debtor’s liability, and was issued only to comply with IRS administrative requirements.

A few practical tips may help banks protect themselves from challenges to their proofs of claim or debt collection activities following issuance of a 1099-C: 

  • The bank can attach a notice to the 1099-C when sent to the debtor stating that the 1099-C is being filed due to administrative requirements of the IRS, but in no way constitutes a waiver of the bank’s claims against the debtor, which claims the bank expressly reserves the right to pursue.
  • Note that the 1099-C  form includes a box for the bank to provide an “identifiable event” code.  A bankruptcy filing by the debtor is an identifiable event so the bank should make sure to list the bankruptcy code in this box as doing so may bolster the argument that the bankruptcy case triggered the bank’s duty to file a 1099-C, but does not signify that the bank released its claim or will forego its right to file a proof of claim in the bankruptcy case. 
  • In the event a bank realizes that it has made an erroneous 1099-C filing, the bank should make a corrective filing promptly because some courts have shown a greater inclination to deny or subordinate a bank’s claim due to an erroneous 1099-C filing, especially if collection activity was ongoing. 
  • Finally, the most prudent course of action is for a bank to carefully evaluate the necessity and timing of filing a 1099-C and refrain from filing one until it is clear that the bank has exhausted collection options, an “identifiable event” has occurred within the meaning of I.R.C. Section 6050P, and the bank is prepared to forgive the remaining balance owed.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Poyner Spruill LLP | Attorney Advertising

Written by:

Poyner Spruill LLP
Contact
more
less

Poyner Spruill LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!