Consumer complaint received 2022-03-10
Company: DISCOVER BANK
State: IN
Product: Credit reporting, credit repair services, or other personal consumer reports
Sub-product: Credit reporting
Issue: Incorrect information on your report
Sub-issue: Account information incorrect

Complaint:
Discover is reporting a balance due to the major credit bureaus even though they cancelled/discharged the debt and issued a 1099-C The Issuance of a 1099-C and The Fair Credit Reporting Act There is no bright line rule regarding what should be reported on a consumers credit report when a 1099-C is issued. Although the IRS has provided some guidance in various information letters, federal and state courts have interpreted the IRS guidance in different ways. Nationwide, courts differ as to whether issuing a 1099-C extinguishes a debt and prohibits a creditor from pursuing collection or reporting the debt. While some courts are holding that the existence of a 1099-C form does not operate to distinguish a debt, other courts have held that it is inequitable to allow a creditor to belatedly enforce the alleged debt after it received the tax benefit of the charge-off.

Some Courts Find That Issuance of a 1099-C is Evidence of a Discharge Some courts have been persuaded that it is inequitable to allow a creditor to belatedly enforce the alleged debt after it received the tax benefit of the charge-off. See, e.g., In re Crosby, 261 BR 470, 474 ( Bankr. Ct. D. Kan. XXXX  ) ( " The actual ( or at least potential ) tax consequences of the form make it inequitable to allow the [ creditor ] to enforce its claims against the debtors '' ) ; Discover Bank v. Shimer , 36 Misc . 3d 1214 ( A ), 1, 957 N.Y.S.2d 263, 263 ( N.Y. Dist. CtXXXX XXXX ) ( holding that it is inequitable to allow [ a creditor ] to belatedly enforce the alleged debt after it received the tax benefit of the charge-off ) ; Amtrust Bank v. Fossett , 223 Ariz. 438, 441, 224 P.3d 935, 938 ( Ariz. Ct. App . XXXX  ) ( issuance of Form 1099-C after debt was written off is " prima facie evidence '' that debt had been discharged by creditor, sufficient to create an issue of fact ) Franklin Credit Mgmt . Corp. v. Nicholas, XXXX  Conn. Super. LEXIS 1908 ( Conn. Super. Ct. XXXX XXXX XXXX XXXX ( It would be inequitable to require that [ Defendant ] report the discharge of debt as income on his federal tax return or face the potential tax consequences and hold that the plaintiff may continue to hold him liable on the debt. ). Similarly, in In re Reed, the bankruptcy court stated that although it generally agreed with the assessment that the IRS requires financial institutions to issue a 1099-C as a reporting requirement, it disagreed with courts that conclude that the issuance of a Form 1099-C does not, alone, operate to extinguish a debt. 492 B.R. 261, 269 ( Bankr. E.D. Tenn. XXXX  ). The bankruptcy court reasoned that the IRS interpretation in the above referenced information letters is in direct conflict with the Internal Revenue Code and the fact that cancellation of indebtedness income is included within a debtors gross income. Id. at 270. The court further determined that the issuance of a Form 1099-C reflects that a financial institution has, in accordance with 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1, discharged an indebtedness. Id. at 271.

NOTE : If the identifiable event is a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity, then in fact discharge of debt did occur. If Discover did not intend to cancel the obligation when they reported the 1099-C to the IRS, then Discover should have provided me with a written statement included with the 1099C that stated the issuance of the 1099-C is to comply with IRS regulations and is not to be deemed a cancelation of the debt. 
I have disputed the balance on my old Discover account with XXXX XXXX and XXXX. The credit bureaus will update the balance to {$0.00} due to having a copy of the 1099-C. Then within 30 days of those disputes, Discover updates to the credit bureaus that the balance is OVER {$22000.00}. This is a vicious cycle that has to stop. I called Discover on XX/XX/XXXX and spoke with XXXX and XXXX regarding this matter and both of them told me that Discover would continue to keep reporting a balance of over {$22000.00} to the credit bureaus. Both XXXX and XXXX stated that Discover canceled/discharged the debt and that Discover would NEVER attempt to collect the debt as Discover issued a 1099-C and lawfully they can not accept any payments. Question- Is it worth it to Discover to risk litigation to keep reporting a balance on a debt that Discover clearly issued a 1099-C with code G? Or would it be better for Discover to report to the credit bureaus that the balance on the account is {$0.00}.

I sincerely apologize for not paying Discover, I had many difficult situations arise in late XXXX, many hardships and despair in XXXX and XXXX. A few months ago things started to change, I am finally back on my feet, have accepted the many loses I have suffered, have overcome health conditions and have risen from despair. I realize that Discover does not care what happened to me financially, personally, mentally and physically and will most likely view my explanations as excuses for not paying. However, I would really appreciate if Discover would be so kind as to update the balance on my old account to {$0.00} balance per the 1099-C that was issued. I am desperately trying to refinance the mortgage on my home and Discovers reporting of a balance of over {$22000.00} is preventing from qualifying for a refinance.

Company response to consumer: Closed with explanation