United States: Discharge Of Debts: The Potential Unintended Consequences Of Issuing A Form 1099-C

Last Updated: October 13 2015
Article by Eric J. Breithaupt

In the typical bad debt situation, a financial institution will issue a Form 1099-C to the Internal Revenue Service ("IRS") and the borrower when a loan is written off. That administrative act is proving to be a new battleground with debtors who seek to find ways out of repaying their obligations. Most often, the issue arises where a lender forecloses on property, and in the process of charging off the loan, issues a Form1099-C while still attempting to recover a remaining deficiency balance. At the heart of the issue is the impact of the issuance of Forms 1099-A and 1099-C to the IRS. Form 1099-A is filed where a lender, in connection with a trade or business, and in full or partial satisfaction of a debt, acquires an interest in property that is security for that debt. See www.irs.gov/uac/About-Form-1099-A. Form 1099-C is filed for each debtor for whom more than $600 of debt is cancelled by an applicable financial entity and where an identifiable event has occurred. See, www.irs.gov/uac/About-Form-1099C. Where lenders have mistakenly issued a Form 1099-C and are still attempting to collect a deficiency balance following foreclosure, an emerging defense claimed by borrowers is that the indebtedness has been discharged.

The great weight of authority is that the mere issuance of a Form 1099-C does not serve to discharge a debt. Examples include:

  • FDIC v. Cashion, 720 F.3d 169, 176-81 (4th Cir. 2013) (Form 1099-C did not create issue of material fact as to whether debt had been canceled or assigned);
  • Owens v. Commissioner of Internal Revenue, 2003 U.S. App. LEXIS 12481, 2003 WL 21196200, at *3 (5th Cir. May 15, 2003) (Form 1099-C was not evidence that creditor actually canceled debt, but at most reflected intention to cancel debt in the future);
  • Capital One v. Massey, 2011 U.S. Dist. LEXIS 83817, 2011 WL 3299934, at *3 (S.D. Tex. Aug. 1, 2011) ("a 1099-C does not discharge debtors from liability" and "fact that [creditor] issued a 1099-C in relation to the borrowers' indebtedness is irrelevant and does not raise a genuine issue of material fact");
  • United States v. Reed, 2010 U.S. Dist. LEXIS 96079 2010 WL 3656001, at *2 (E.D. Tenn. 2010) (in absence of evidence "such as a surrender or cancellation of the note or a signed writing" by creditor, creditor was entitled to judgment as a matter of law);
  • In re Sarno, 463 B.R. 163, 168 (Bankr. D. Mass. 2011);
  • In re Zilka, 407 B R. 684, 689 (Bankr: W.D. Penn. 2009);
  • Carrington Mortgage Services, Inc. v. Riley, 478 B.R. 736, 744 (Bankr. D.S.C. 2012); and
  • Sims v. Commissioner, 2002 Tax Summary LEXIS 78, 2002 WL 1825373, at *2 (T.C. Summ. Op. 2002-76, June 26, 2002).

​A minority of decisions, however, have held that the errant issuance of a Form 1099-C can form the basis for the discharge of an existing indebtedness. The lead case relied upon by borrowers to support a discharge of indebtedness is In re Reed, 492 B.R. 261 (Bankr. E.D. Tenn. 2013). Even the Reed Court agreed, however, "with the other courts holding that the issuance of a 1099-C by a financial institution does not, as a matter of law, operate to extinguish an indebtedness." Id. at p. 272. To succeed under Reed, a debtor must also point to an "identifiable event" as defined in 26 C.F.R. §1.6050P-1, such as a discharge in bankruptcy, a foreclosure, an expiration of a statute of limitations, or an accord and satisfaction. There is, however, a second prong of Reed which sets up an equitable defense. Where a taxpayer/borrower can substantiate that he/she acted in reliance upon the issuance of a Form 1099-C, has filed a tax return which recognized income and paid tax based upon the errant filing of the Form 1099-C, it is also possible to argue for a discharge of the indebtedness.

Perhaps the most detailed discussion of the impact of filing a Form 1099-C by a creditor appears in the decision of In re Sarno, 463 B.R. 163 (Bankr. D. Mass. 2011). There, a Chapter 13 debtor objected to the mortgage claim of a credit union based, in part, on the mistaken issuance of a Form 1099-C, which under the debtor's view, served to cancel the mortgage debt. In rejecting the argument, the Court relied upon 26 CFR §1.6050P-1 to hold that a Form 1099-C is "informational" and that it must be filed "whether or not an actual discharge of indebtedness has occurred." The Court then turned to the Massachusetts version of §3-604(a) of the Uniform Commercial Code (which is identical to most states) to apply the rule that there must either be an "intentional act" or a "signed writing" to evidence a discharge of debt. In the absence of either, the issuance of the Form 1099-C alone is insufficient to create a cancelation of debt.

While the majority of opinions suggest that the errant issuance of a Form 1099-C is insufficient to create a discharge of debt, providers of credit who seek to continue collecting deficiency balances after the liquidation of collateral are cautioned to take care in the issuance of tax documents to the IRS. A failure of diligence may cause the lender to incur needless legal fees in the effort to continue with collection efforts from an otherwise collectable borrower, and potentially may cause the extinguishment of all collection rights if pro-active efforts are not undertaken to correct any errant issuance of the improper tax forms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Eric J. Breithaupt
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.