By Lauren Bikoff, MLS
Referencing sending a report to the IRS may instill angst in the unsophisticated debtor and may violate the FDCPA, according to the Seventh Circuit.
A debt collection letter that contained a warning about the tax consequences of settling a debt may violate the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Seventh Circuit has ruled. As a result, the Seventh Circuit reversed the district court’s motion to dismiss and remanded the case back to the district court for further proceedings (Heredia v. Capital Management Services, L.P., Nov. 8, 2019, Wood, D.).
Background. Debt collector Capital Management Services, L.P. (CMS) regularly sends out personalized collection letters to debtors, containing individual payment options, and often multiple options, to debtors to clear their debt. The plaintiff received four letters from CMS in 2016 and 2017, and at least one of the letters stated, "Settling a debt for less than the balance owed may have tax consequences and Discover may file a 1099C form."
The Seventh Circuit noted that the IRS requires a creditor to file a 1099C form if it has forgiven at least $600 in principal. The plaintiff argued that Discover would never file a 1099C form unless required to by law. According to the court, the creditor knows for certain whether it is offering to forgive more or less than $600 in principal, while the debtor may have a difficult time determining how much is owed in principal versus interest.
Less than $600 to be forgiven. In the letter from CMS, the plaintiff was given three payment options and more than $600 in principal would not be forgiven in any of the options, meaning that a 1099C form would not be filed. The Seventh Circuit concluded that the language in the collection letter "is misleading in a material way." In addition, "the reference to a report to the IRS may instill angst in the unsophisticated debtor."
However, questions of whether particular statements are deceptive or misleading are usually questions of fact and the province of the district court. Therefore, the Seventh Circuit vacated the motion to dismiss, and remanded the case for further proceedings.
The case is No. 19-1296.
Attorneys: Francis R. Greene (Stern Thomasson LLP) for Mabel L. Heredia. James K. Schultz (Sessions, Fishman, Nathan & Israel, LLC) for Capital Management Services, L.P.
Companies: Capital Management Services, L.P
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