IRS Form 1099-C – Cancellation and Collection of Debt

The issue that seemingly pops up every other year is whether the filing and issuance of a Form 1099-C, entitled Cancellation of a Debt, also prevents the creditor who issued the 1099-C from attempting to collect the debt from the debtor.

Before discussing that, let’s discuss what the IRS Form 1099-C is and why is it issued. The short answer is that it is an informational form that certain entities must file if they are a covered entity that cancels the debt of a debtor in the amount of $600 or more and an identifiable event has occurred.  As the IRS Instructions for Form 1099-C state, the 1099-C form must be filed regardless of whether the debtor is required to report the cancelled debt as income. The entities that most often are required to file a 1099-C are financial institutions, credit unions and finance and credit card companies. These entities have very short deadlines by which to file the 1099-C and filing is mandatory.  Both the Form 1099-C and implementing regulations clearly state that the 1099-C is an information reporting requirement. So what happens when a lender makes a loan to a borrower, the borrower defaults, a Form 1099-C is filed and issued to the borrower, and the lender then sues the borrower to recover the balance due on the loans made to the debtor?

In Flathead Bank v. Masonry by Muller, a  summary judgment case involving four loans to a debtor and his company, the Montana Supreme Court held that the issuance of a Form 1099-C did not discharge the debt, the bank was entitled to recover the balance due on the loans made to the debtor and rejected the debtor’s argument that the 1099-C discharged the loans and therefore, the bank could not recover. See Flathead Bank v. Masonry By Muller, Inc., 383 P.3d 215 (Mont. 2016). The Supreme Court of Montana’s opinion is consistent with what appears to be the majority opinion and I refer you to the opinion by the United States Court of Appeals for the Fourth Circuit in FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013).

The U.S. Court of Appeals for the Fourth Circuit’s opinion in FDIC v. Cashion outlines most of the arguments for and against the different treatments of the Form 1099-C. See FDIC v. Cashion, 720 F.3d 169, 179 (4th Cir. 2013) (holding that the 1099-C is a creditor’s required means of satisfying a reporting obligation to the IRS; it is not a means of accomplishing an actual discharge of the debt, and relying on two IRS Information Letters – IRS Info. 205-0207, 2005 WL 3561135 (Dec. 30, 2005) and IRS Info 2005-0208, 2005 WL 3561136 (Dec. 30, 2005)); see also Owens v. Commissioner, 2003 U.S. App. LEXIS 12481 (5th Cir. May 15, 2003) (per curiam) (unpublished) (holding that the 1099-C is not evidence of cancellation of a debt but at most an intent to cancel the debt at a future date).

The lead minority case consistently relied upon or referenced is In re Reed, 2013 PTC 105 (Bankr. E.D. Tenn. 2013) which rejected the majority position with a caveat. The court, readily acknowledging that it was adopting the minority position, held that the debt was discharged because the debt was reported on the Form 1099-C, the debtor relied and paid taxes on the cancelled debt and held, as a result, debtors were no longer indebted to the bank for the indebtedness reported on the Form 1099-C. However, the court noted that since the Form 1099-C did not report interest, costs and reasonable attorney’s fees, the creditor could seek to recover these items and they were still due and owing by debtor.

Remember, the 1099-C is an informational reporting requirement that has to be made to the IRS and not an admission by the covered entity. A covered entity may have to file a Form 1099-C even if there is no intent to discharge the debt or seek recovery because an event has occurred. The issue of whether a creditor that was required to file the information report can then sue to recover the balance owed will probably be litigated endlessly. Hopefully, this blog article provides a good starting point if it comes up in your practice. The opinions in this blog are solely the author’s and any suggestion, replies or comments are welcome. Please send them to me at