2018 Annual Governmentwide Federal 

Receivables Management Symposium

Back to Basics: Living the Legacy of the DCIA

Debt Collection Myths

May 24, 2018

L E A D ∙ T R A N S F O R M ∙ DE L I V E R
Page 2 L EAD ∙ T RANSFORM ∙ D ELIVER

• An agency has discretion regarding whether 

to establish debts owed to the agency.

Establishing Debts: Fact or Myth?
Page 3 L EAD ∙ T RANSFORM ∙ D ELIVER

• Agencies must determine that a debt is owed 

when it becomes aware of facts sufficient to 

establish that the agency is owed a amounts 

arising out of activities of the agency. 

– A debt may exist even though the amount of funds, 

money, or property owed to the United States is unknown 

or unliquidated. 

• However, a cost/benefit analysis may be used in 

some cases to avoid establishing a debt. 

– For example, if the costs of auditing records and 

determining whether a debt exists exceed the amounts 

that might be collected, an agency may be able to justify 

not establishing a debt (just as it would be able to justify 

terminating collection action).

Establishing Debts: Myth
Page 4 L EAD ∙ T RANSFORM ∙ D ELIVER

If my agency has a tort claim against someone 

who denies liability, I can start administrative 

debt collection action without reducing a debt 

to judgment (i.e., without going to court).

Establishing Debts: Fact or Myth?

Hint: Example of a tort would be if a person 

accidentally hit and damaged a government 

vehicle because they weren’t paying close 

enough attention while driving.
Page 5 L EAD ∙ T RANSFORM ∙ D ELIVER

• Unless required by statute, an agency does not need 

to reduce a claim to judgment when making a 

determination that a debt is owed. 

• However, an agency must follow agency procedures 

for establishing a debt.

• The relevant statutory authority for establishing debts 

merely requires that “an appropriate official of the 

Federal Government” determine that an “any amount 

of funds or property” is owed to the United States. 31 

U.S.C. 3701(b).

Establishing Debts: Fact
Page 6 L EAD ∙ T RANSFORM ∙ D ELIVER

• Federal administrative wage garnishment 

permits agencies to collect debts by 

garnishing a debtor’s wages without a court 

order, even when state law prohibits wage 

garnishment.

Wage Garnishment: Fact or Myth?
Page 7 L EAD ∙ T RANSFORM ∙ D ELIVER

• The applicable statute that permits 

administrative wage garnishment is a federal 

statute that, by its terms, applies 

“[n]otwithstanding state law.” 

• Federal agencies can garnish wages 

regardless of what a state’s regulations, 

statutes, or constitution says. Federal 

agencies can even garnish the wages of 

state employees.

Wage Garnishment: Fact
Page 8 L EAD ∙ T RANSFORM ∙ D ELIVER

• Agencies have authority to waive all or a 

portion of a debt (with a principal balance of 

less than $100k) only if they follow the 

Federal Claims Collection Standards.

Compromise: Fact or Myth?
Page 9 L EAD ∙ T RANSFORM ∙ D ELIVER

• Compromises result in forgiveness of indebtedness income (think, 

1099C reporting) and are based on consideration. 

– The Federal Claims Collection Standards (FCCS) provide standards for 

compromising debts. 

• Waiving a debt essentially makes it as if the debt never existed.

– There is no general waiver authority. To waive debts, you need specific 

authority (e.g., employee debts; interest/penalties/costs). 

– When there is waiver authority, the standard is generally that collection of 

the debt is against equity and good conscience or is not in the best 

interest of the United States.

• This standard is not satisfied solely because the debt was incurred 

through the fault of the creditor agency and not fault of the debtor 

(e.g., overpayment debts).

• Agencies should consider whether the debtor: 

– knew of the circumstances giving rise to the debt 

– made efforts to resolve the debt.

– relinquished a valuable right or changed positions to the debtor’s 

detriment due to reasonable reliance upon the agency’s actions

Compromise: Myth
Page 10 L EAD ∙ T RANSFORM ∙ D ELIVER

• Let’s say that Debtor A and Debtor B are 

jointly and severally liable on a debt. Total 

debt is $100.

• Agency and Debtor A agree to compromise 

the debt for $10. Debtor A pays the $10.

• Agency can no longer pursue either Debtor A 

or Debtor B for the debt.

Compromise: Fact or Myth?
Page 11 L EAD ∙ T RANSFORM ∙ D ELIVER

• The compromise agreement should make 

clear that the compromise was only between 

Debtor A and the agency.

• A compromise between one co-debtor and 

the agency generally has no affect on how 

the agency must treat another co-debtor.

• However, similarly situated debtors should be 

treated similarly. 

Compromise: Myth
Page 12 L EAD ∙ T RANSFORM ∙ D ELIVER

• A delinquent debtor can choose to apply a 

partial payment to the principal only (rather 

than penalties, interest, etc.).

Partial Payments: Fact or Myth?
Page 13 L EAD ∙ T RANSFORM ∙ D ELIVER

• When a debt is paid in partial payments, 

amounts must be applied in the following 

order:

– contingency fees 

– outstanding penalties

– administrative costs other than contingency fees

– interest

– principal

Partial Payments: Myth
Page 14 L EAD ∙ T RANSFORM ∙ D ELIVER

• If an agency terminates debt collection 

action, it may not collect through offset in the 

future.

Termination: Fact or Myth?
Page 15 L EAD ∙ T RANSFORM ∙ D ELIVER

• The Federal Claims Collection Standards 

expressly permit agencies to preserve 

records after terminating debt collection 

action for the purpose of offsetting future 

payments. 

Termination: Myth
Page 16 L EAD ∙ T RANSFORM ∙ D ELIVER

Agencies must seek DOJ concurrence before 

writing off debts with a principal balance of 

$100,000 or greater?

Write-off: Fact or Myth?
Page 17 L EAD ∙ T RANSFORM ∙ D ELIVER

• This statement is generally true when an 

agency is seeing to compromise or terminate 

collection upon a debt over $100k.

• Write off and termination of collection action, 

however, are two different things.

– Write-off is an accounting concept that allows 

agencies to accurately reflect the value of their 

receivables on their books and is governed by OMB 

Circular A-129.

– Termination is a legal determination that the agency 

may cease its efforts to collect a debt and is 

governed by the Federal Claims Collection 

Standards.

Write-off: Myth
Page 18 L EAD ∙ T RANSFORM ∙ D ELIVER

The Internal Revenue Code does not permit 

1099-C reporting for amounts less than $600.

1099-C Reporting: Fact or Myth?
Page 19 L EAD ∙ T RANSFORM ∙ D ELIVER

• Generally, agencies are required to report 

cancellation of indebtedness income if they 

compromised more than $600. 

• But, they are still permitted to file 1099Cs for 

the smaller amounts.

1099-C Reporting: Myth
Page 20 L EAD ∙ T RANSFORM ∙ D ELIVER

• If my computer system does it, then it must 

be legal. 

Legal Compliance: Fact or Myth?
Page 21 L EAD ∙ T RANSFORM ∙ D ELIVER

• Hopefully, our computer systems are 

programmed to comply with the law. 

• But, sometimes there are oversights and 

sometimes the law changes faster than we 

can update our systems. 

• It is important to keep in mind that, just 

because the computer lets you do it (or 

doesn’t let you do it), doesn’t mean its 

consistent with legal standards.

Legal Compliance: Myth
Page 22 L EAD ∙ T RANSFORM ∙ D ELIVER

• If your agency’s legal counsel is looking the 

file over, then the debt is exempt from 

mandatory referral to the Treasury Offset 

Program and the Cross-Servicing Program.

Referral Requirement: Fact or Myth?
Page 23 L EAD ∙ T RANSFORM ∙ D ELIVER

• Debts are required to be referred by 120 or 

180 days. 

• If legal is looking over the file, it does not 

meet the “in litigation” exception.

– Possible exception if agency has independent 

litigating authority and the commencement of 

litigation is imminent. 

• Note that there are certain other reasons that 

a debt may be exempt or ineligible for 

referral. 

Referral Requirement: Myth
Page 24 L EAD ∙ T RANSFORM ∙ D ELIVER

• I only need to determine the statute of 

limitations for litigation once I have decided 

to review the file to determine whether to 

litigate.

Preparing for Litigation: Fact or Myth?
Page 25 L EAD ∙ T RANSFORM ∙ D ELIVER

• While an agency must look at the statute of 

limitation before determining whether it can 

litigate, the agency should not necessarily 

wait until it is considering litigation to 

determine the statute of limitation -- by then, 

it may be too late.

Preparing for Litigation: Myth
Page 26 L EAD ∙ T RANSFORM ∙ D ELIVER

I don’t have to repeat due process notification 

just because I am adding amounts to the 

principal debt balance.

Due Process: Fact or Myth?
Page 27 L EAD ∙ T RANSFORM ∙ D ELIVER

• Additional due process is likely required.

– Adding amounts to the principal debt balance is 

an adverse action. 

– The debtor is entitled to notification and an 

opportunity to dispute.

• Note, additional due process likely not 

required when adding interest, penalties and 

costs to the debt balance, 

– This assumes the debtor was properly notified of 

how the agency would accrue and assess these 

amounts.

Due Process: Myth
Page 28 L EAD ∙ T RANSFORM ∙ D ELIVER

• Due process notification is insufficient unless 

it was actually received by the debtor.

Due Process: Fact or Myth?
Page 29 L EAD ∙ T RANSFORM ∙ D ELIVER

• Generally, due process notification is 

sufficient if it was sent to the last known 

address, even if the debtor does not receive 

actual notice.

• Nevertheless, agencies should ensure they 

have appropriate procedures in place to 

update address information.

Due Process: Myth
Page 30 L EAD ∙ T RANSFORM ∙ D ELIVER

• If a debtor receives an overpayment, interest 

begins to accrue from the date of the 

overpayment.

Interest: Fact or Myth?
Page 31 L EAD ∙ T RANSFORM ∙ D ELIVER

• Interest generally starts accruing at the date 

of delinquency (date of notice of 

overpayment and demand for payment).

Interest: Myth
Page 32 L EAD ∙ T RANSFORM ∙ D ELIVER

• Debtor did not pay a debt per the terms of a 

contract, which specifies that she must pay a 

2% interest rate. Per 31 U.S.C. 3717, she 

must also pay penalties and costs of 

collection.

Interest/Penalties/Costs: Fact or Myth?
Page 33 L EAD ∙ T RANSFORM ∙ D ELIVER

• In general, the terms of 31 U.S.C. 3717 don’t 

apply if a contract fixes the interest rate. 

• If the agency’s contract fixes the interest rate, 

the agency’s contract should also specify 

costs and penalties, if the agency intends for 

those amounts to apply.

Interest/Penalties/Costs: Myth
Page 34 L EAD ∙ T RANSFORM ∙ D ELIVER

• When DMS takes an offset through TOP, it 

charges the debtor a fee and sends my 

agency the offset amount net of the fees.

DMS Fees: Fact or Myth?
Page 35 L EAD ∙ T RANSFORM ∙ D ELIVER

• TOP has no authority to charge debtors. It 

operates under a number of fee-charging 

statutes. Each of these statutes authorizes 

TOP to charge agencies fees.

• Federal agencies are, with some exceptions, 

generally required to pass these fees as 

costs of debt collection to the debtor. See 31 

U.S.C. § 3717.

DMS Fees: Myth
Page 36 L EAD ∙ T RANSFORM ∙ D ELIVER

Agencies should aggressively pursue 

collection of debts as soon as possible. This 

is, in part, because they must eventually 

terminate administrative debt collection 

action on delinquent debts so that they do 

not collect on a debt that has expired.

Time-Barred Debt: Fact or Myth?
Page 37 L EAD ∙ T RANSFORM ∙ D ELIVER

• Generally, agencies should attempt to pursue 

collection of a debt as soon as possible.

• But, the reason is because younger debts are 

generally more collectable, not because the 

debt may expire.

• While certain debt collection tools may no 

longer be available after a certain period of time 

(e.g., judicial remedies), administrative debt 

collection remedies generally remain available. 

• In general, federal debts do not expire.

Time-Barred Debt: Myth
Page 38 L EAD ∙ T RANSFORM ∙ D ELIVER

• SCRA provides certain protections for 

military members as they enter active duty, 

including protections from high interest rates.

• For the most part, federal agencies don’t 

have to worry about the protection against 

high interest rates, because the interest rates 

charged by federal agencies are generally 

very low (currently, 1%).

Servicemembers Civil Relief Act: Fact and Myth
Page 39 L EAD ∙ T RANSFORM ∙ D ELIVER

• SCRA limits the amount of interest to 6% per 

year during the period of military service. 

• Interest rate is broadly defined to include not 

only interest, but also penalties and 

administrative costs.

• For example, if any agency referred a debt to 

DMS and was charging all amounts required 

under 31 U.S.C. § 3717, including interest (1%), 

penalties (6%), and administrative costs (32% 

based on fees charged by DMS), it would be 

charging far more than the permissible 6%.

Servicemembers Civil Relief Act: Myth
Page 40 L EAD ∙ T RANSFORM ∙ D ELIVER

• If a debtor files for bankruptcy, the agency 

may have to refund not only post-petition 

collections, but also certain collections made 

prior to the petition date.

Bankrupt Debtor: Fact or Myth?
Page 41 L EAD ∙ T RANSFORM ∙ D ELIVER

• Whether the agency must make a refund of preor post-petition collections depends on the type 

of collection.

– Generally, offset collections taken prior to the petition 

date do not need to be refunded.

– Wages garnished during the 90 days prior to the 

petition date may need to be refunded. 

– Wages garnished after the petition date generally 

must be refunded.

– The agency may have setoff rights to keep certain 

offsets taken after the petition date.

• Consult agency counsel.

Bankrupt Debtor: Fact
Page 42 L EAD ∙ T RANSFORM ∙ D ELIVER

• Debtor files for chapter 7 bankruptcy. The 

agency must immediately recall the debt 

from Cross-Servicing and TOP and cease all 

collection action.

Bankrupt Debtor: Fact or Myth?
Page 43 L EAD ∙ T RANSFORM ∙ D ELIVER

• While the fact that the debtor has filed 

bankruptcy may impact how an agency may 

pursue its claim, it does not preclude the agency 

from exercising its right to collect.

• It is true that they agency must recall the debt 

from Cross-Servicing and TOP while the debt is 

subject to the automatic stay.

• However, the agency still conduct some 

collection activities. It may:

– file a proof of claim

– work with DOJ to file a motion for relief from the stay 

in the event it wants to protect its collateral or setoff 

rights, etc.

Bankrupt Debtor: Part Truth, Part Myth
Page 44 L EAD ∙ T RANSFORM ∙ D ELIVER

• Debtor receives an overpayment and later 

dies. Agency must now terminate collection 

action. 

Deceased Debtor: Fact or Myth?
Page 45 L EAD ∙ T RANSFORM ∙ D ELIVER

• Death generally does not extinguish debts. An 

agency’s obligation to affirmatively and 

aggressively collect a debt generally continues 

after the debtor’s death. 

• While some debt collection tools may no longer 

be available or appropriate once a debtor dies 

(e.g., administrative wage garnishment), 

agencies have several other means through 

which to pursue debts owed by decedents.

• Among other things, an agency can: 

– pursue its claims through probate

– pursue its claims through offset

– pursue co-debtors

Deceased Debtor: Myth
Page 46 L EAD ∙ T RANSFORM ∙ D ELIVER

• When an entity goes out of business, an 

agency may still be able to continue 

collection action.

Entity out of Business: Fact or Myth?
Page 47 L EAD ∙ T RANSFORM ∙ D ELIVER

• Individuals can form certain legal entities under state 

law. 

– Generally, these legal entities are separate and legally 

distinct from the individuals who created or control them.

• Because the entities are created under state law, they 

can also be dissolved under state law. 

– The dissolution of an entity must comply with state law. 

– Even if a business has shut its doors and is no longer 

actively engaging in business, it is not dissolved until if 

follows the proper state procedures.

– If the entity did not properly dissolve, the agency should 

consider whether it has a claim against the former 

officers of the entity or against the transferees of the 

entity’s assets.

Entity out of Business: Fact
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• Federal agencies must comply with the Fair 

Credit Reporting Act.

Furnishing and Using Credit Info: Fact or Myth?
Page 49 L EAD ∙ T RANSFORM ∙ D ELIVER

• It is not clear that there has been a waiver of 

sovereign immunity under FCRA.

• Also, other laws (such as the DCIA and the 

Privacy Act) may be more specific and may 

apply, rather than provisions of FCRA.

• Consult agency counsel and carefully 

consider boilerplate language in contracts 

before signing.

Furnishing and Using Credit Info : Unclear
Page 50 L EAD ∙ T RANSFORM ∙ D ELIVER

• If a federal agency or state is owed a debt by 

a federal agency, that debt may be referred 

to TOP.

Federal agencies: Fact or Myth?
Page 51 L EAD ∙ T RANSFORM ∙ D ELIVER

• Federal agencies cannot be debtors for 

purposes of the DCIA.

• Neither a state or another federal agency 

may refer a debt owed by a federal agency to 

Fiscal Service for collection.

Federal agencies: Myth
Page 52 L EAD ∙ T RANSFORM ∙ D ELIVER

• If my agency determines that a collection 

taken by Fiscal Service occurred in error 

(e.g., the debt was not actually valid; the 

debtor filed for bankruptcy, etc.), my agency 

is responsible for issuing any and all 

appropriate refunds, including the costs that 

were added to the debt as a result of Fiscal 

Service’s fees.

Refunds: Fact or Myth?
Page 53 L EAD ∙ T RANSFORM ∙ D ELIVER

• Agencies are responsible for issuing refunds.

• Agencies must refund any costs that were 

erroneously charged to the debtor, 

regardless of whether Fiscal Service 

refunded its fees to the agency.

Refunds: Fact
Privileged and Confidential 54