In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 17-2134

AMY DUNBAR,

Plaintiff-Appellant,

v.

KOHN LAW FIRM, S.C, et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court 

for the Eastern District of Wisconsin.

No. 17-CV-88 — William E. Duffin, Magistrate Judge.

____________________

No. 17-2165 

TAMMY SMITH,

Plaintiff-Appellant,

v.

WELTMAN, WEINBERG & REIS COMPANY, LPA,

Defendant-Appellee.

____________________

Appeal from the United States District Court

for the Southern District of Illinois.

No. 3:16-CV-1333-NJR-SCW — Nancy J. Rosenstengel, Judge.
2 Nos. 17-2134 & 17-2165

____________________

ARGUED JANUARY 18, 2018 — DECIDED JULY 19, 2018

____________________

Before SYKES and HAMILTON, Circuit Judges, and LEE, 

District Judge.1

SYKES, Circuit Judge. Amy Dunbar and Tammy Smith received collection letters offering to settle their debts at a 

significant discount. Both letters included the warning: “This 

settlement may have tax consequences.” In separate suits 

Dunbar and Smith claimed that this statement is misleading 

in violation of the Fair Debt Collection Practices Act 

(“FDCPA”), 15 U.S.C. § 1692e, because they were insolvent 

when they received the letters and therefore would not have 

incurred a tax liability for any discharged debts. 

The courts below rejected that argument and dismissed 

the suits on the pleadings. We consolidated the appeals and 

now affirm. The challenged statement is not false or misleading because “may” does not mean “will” and insolvent 

debtors might become solvent before settling their debt, 

triggering the possibility of tax consequences.

I. Background

In January 2016 the Kohn Law Firm, S.C., a collection law 

firm, sent Amy Dunbar a letter seeking to collect a debt 

originally owed to a bank. The letter stated that the full

balance due was $4,049.08 and offered to settle the debt for 

$2,631.90, but warned: “NOTICE: This settlement may have 

 

1 Of the Northern District of Illinois, sitting by designation. 
Nos. 17-2134 & 17-2165 3

tax consequences.” Dunbar was insolvent when she received 

the letter and filed for bankruptcy six months later.

That same month Weltman, Weinberg & Reis, also a collection law firm, sent Tammy Smith a collection letter seeking to collect a consumer credit-card debt. The letter stated 

that the balance due was $4,319.69 and invited Smith to 

contact the law firm to discuss satisfying her debt obligation 

for a reduced amount. Like Dunbar’s letter, this letter

warned: “This settlement may have tax consequences.”

Smith too was insolvent when she received the letter and 

filed for bankruptcy two months later. 

Dunbar and Smith filed separate actions under § 1692e 

alleging that the collection letters were misleading because 

they were insolvent and therefore would not have had to 

pay taxes on any discharged debt. A magistrate judge and 

district judge, respectively, dismissed the cases for failure to 

state a claim. See FED. R. CIV. P. 12(b)(6). Both judges concluded that alerting debtors that a settlement “may” have tax 

consequences is neither false nor misleading.

II. Discussion

The FDCPA makes it unlawful for a debt collector to use 

“any false, deceptive, or misleading representation or means 

in connection with the collection of [a] debt.” § 1692e. An

objective “unsophisticated consumer” standard applies to 

§ 1692e claims: We ask “whether a person of modest education and limited commercial savvy would be likely to be 

deceived” by the debt collector’s representation. Evory v. 

RJM Acquisitions Funding L.L.C., 505 F.3d 769, 774 (7th Cir. 

2007). The objective test disregards “bizarre” or “idiosyncratic” interpretations of collection letters. Gruber v. Creditors’ 
4 Nos. 17-2134 & 17-2165

Prot. Serv., Inc., 742 F.3d 271, 274 (7th Cir. 2014); Durkin v. 

Equifax Check Servs., Inc., 406 F.3d 410, 414 (7th Cir. 2005). A

collection letter can be “literally true” and still be misleading, Gonzales v. Arrow Fin. Servs., LLC, 660 F.3d 1055, 1062 

(9th Cir. 2011)—for example, if it “leav[es] the door open” 

for a “false impression,” Fields v. Wilber Law Firm, P.C., 

383 F.3d 562, 566 (7th Cir. 2004). 

Because this is a fact-laden inquiry, dismissal on the 

pleadings is proper only in “cases involving statements that 

plainly, on their face, are not misleading or deceptive.” 

Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 366 (7th 

Cir. 2018) (quotation marks omitted). Our review is de novo. 

Gruber, 742 F.3d at 274.

To begin, the statement at issue here—“this settlement 

may have tax consequences”—is literally true. The discharge 

of a debt is generally considered taxable income. 26 U.S.C. 

§ 61(a)(11). There are some exceptions. Relevant here, the 

discharge of a debt is not taxable if it occurs while the taxpayer is insolvent, meaning that his liabilities exceed the 

value of his assets. Id. § 108(a)(1)(B), (d)(3). We accept, as we 

must, that Dunbar and Smith were insolvent when they 

received the collection letters. No matter. A generalized

statement that a debt settlement “may” have tax consequences is true on its face.

A literally true statement may be misleading if it gives a 

false impression. The plaintiffs argue that the warning has 

this effect for two reasons. First, they contend that a debtor 

might read the tax-consequences statement to mean that if 

he does not pay the full balance owed, the debt collector or 

creditor will report him to the IRS. But the challenged statement says nothing whatsoever about IRS reporting, so we 
Nos. 17-2134 & 17-2165 5

can safely disregard that proposed reading as “bizarre” or 

“idiosyncratic.”2 Gruber, 742 F.3d at 274.

Second, the plaintiffs insist that a debtor might read the 

reference to “tax consequences” to mean that he could incur 

a tax liability if he settles his debt for less than the full 

amount due, and that’s contextually misleading because 

most recipients of debt-collection letters are insolvent and 

therefore would incur no tax liability from a discharged 

debt. We’re not persuaded. An unsophisticated consumer 

would not understand the word “may” to mean “will.” And 

an insolvent debtor can emerge from insolvency at any time.

Our decision in Taylor v. Cavalry Investment, L.L.C., 

365 F.3d 572 (7th Cir. 2004), is instructive on this point. The 

collection letter there stated: “[I]f applicable, your account 

may have or will accrue interest at a rate specified in your 

contractual agreement with the original creditor.” Id. at 574. 

For one of the plaintiffs, the account continued to accrue 

interest, but for the other two, the accounts were closed and

the creditors stopped adding interest. Id. The plaintiffs

argued that the statement was false in violation of the 

FDCPA because two of the creditors were no longer adding

interest. Id. at 575. We called that argument “downright 

frivolous” because “[t]he letter didn’t say they would [add 

interest], only that they might.” Id. Similarly here, it is not

misleading to say that a debtor who settles a debt may incur 

 2 In some situations an entity that discharges a debt must file a 1099-C 

form with the IRS. 26 U.S.C. § 6050P(a). No obligation to report exists if 

the principal debt forgiven falls below $600. 26 C.F.R. § 1.6050P-1(a)(1), 

(d)(2)–(3); 26 U.S.C. § 6050P(b). The reporting obligation has no bearing 

on this case because the law-firm collection letters did not mention IRS 

reporting.
6 Nos. 17-2134 & 17-2165

a tax liability. The use of the word “may” signals only that 

tax consequences are possible in the case of some debtors, 

not that tax consequences are possible or likely (much less 

certain) in this particular debtor’s circumstances.

Further, contrary to the plaintiffs’ argument, the taxconsequences warning does not give the false impression 

that debtors should pay their entire debt to avoid a tax

liability. The letters are invitations to settle the debt and are 

clearly meant to encourage the debtor to take advantage of 

the discount offered. A rational debtor knows that income 

taxes are calculated as a percentage of income, and he would 

likewise understand that even if the discount counts as 

taxable income, the benefit would still outweigh the cost. 

That makes it all the more implausible that the taxconsequences warning would dupe a debtor into paying the 

full debt amount. 

The plaintiffs rely heavily on our decision in Lox v. CDA, 

Ltd., 689 F.3d 818 (7th Cir. 2012), but that case is easily 

distinguished. The debt-collection letter there stated: “Our 

client may take legal steps against you[,] and if the courts 

award [judgment], the court could allow court costs and 

attorney[’s] fees.” 689 F.3d at 820–21 (emphasis added). In 

reality, however, an award of attorney’s fees was impossible

because the contract between the debtor and creditor did not 

provide for them. Id. at 823–24. We found this statement 

misleading because it implied that the debt collector could 

do something—file a lawsuit to recover the debt plus attorney’s fees—that it was not authorized to do. Id. at 824–25. In 

contrast, the tax-consequences statement at issue here is not 

misleading because it does not imply that the debt collector 

may or will do something it has no authority to do.
Nos. 17-2134 & 17-2165 7

The plaintiffs also rely on Gonzales v. Arrow Financial Services, 660 F.3d 1055 (9th Cir. 2011), but that case too is distinguishable. There the debt collector was collecting on a 

portfolio of debts that were more than seven years old and 

therefore obsolete, which meant none of them could be 

reported to a credit bureau. Id. at 1059. The collection letter 

stated: “Upon receipt of the settlement amount and clearance of funds, and if we are reporting the account, the appropriate credit bureaus will be notified that this account has been 

settled.” Id. The debt collector’s conditional language—“if we 

are reporting the account”—made the statement literally 

true. Id. at 1062. But the statement implied that the debt 

collector could report the obsolete debts to a credit bureau;

the Ninth Circuit found that implication misleading because 

there were no circumstances under which it could do so. Id.

at 1063. Again our case is meaningfully different. The taxconsequences warning does not imply that the debt collector 

can or will take an action it has no authority to take.

Another distinguishing feature in both Lox and Gonzales

is that the conditions were static. There was no chance that 

the contract between the debtor and creditor in Lox would be 

rewritten to provide for attorney’s fees. Nor was there any 

possibility that the old, obsolete debts in Gonzales would 

suddenly become reportable to a credit bureau. Solvency, on 

the other hand, is fluid. An insolvent debtor may become

solvent before settling his debt. So it is not misleading to say 

that a debt settlement “may” result in a tax liability—not 

only because solvent recipients may face tax consequences 

but also because insolvent recipients like Dunbar and Smith

could become solvent before settling their debts. 
8 Nos. 17-2134 & 17-2165

Yet another reason Lox and Gonzales do not apply here is 

that a debt collector has no reason or way to know whether 

an individual debtor is solvent or insolvent at a given time. 

In contrast, the debt collector in Lox knew (or could easily 

determine) whether the contract between the creditor and 

debtor allowed for attorney’s fees, and the debt collector in 

Gonzales was well aware that the debts it was collecting were 

obsolete and therefore not reportable to credit bureaus. 

Here, in contrast, a consumer would not expect a debt 

collector to know his financial status and therefore would 

not expect a debt-collection letter to be specially tailored to 

his particular financial circumstances, whether solvent or 

insolvent. 

The plaintiffs also invoke a handful of district-court decisions, but all are inapplicable or unpersuasive. In Drennan v. 

Van Ru Credit Corp., 950 F. Supp. 858, 860 (N.D. Ill. 1996), the 

challenged collection letter stated: “The legal review process 

may ... result in a recommendation to your creditor to file a 

lawsuit against you.” Drennan involved a particular subsection of § 1692e that makes it unlawful for debt collectors to 

“threat[en] to take any action ... that is not intended to be 

taken.” Id. (citing 15 U.S.C. § 1692e(5)). The district court 

denied a motion to dismiss because the complaint alleged 

that the debt collector had no intention of recommending 

that the creditor sue the debtor. Id. Any comparison to

Drennan is entirely inapt; the defendants here are not accused of making a false threat.3

 3 The plaintiffs’ reliance on Federal Trade Commission commentary is 

misplaced for the same reason. The commentary in question discusses 

when a debt collector is permitted to threaten possible action by it or a 

third party. Statements of General Policy or Interpretation, Staff Com-
Nos. 17-2134 & 17-2165 9

Next, the plaintiffs point to district-court decisions finding collection letters misleading because they generalized 

that the debt collector was required to report settlements to 

the IRS without identifying the circumstances under which 

no such report was necessary. See Carlvin v. Ditech Fin. LLC, 

237 F. Supp. 3d 753, 758 (N.D. Ill. 2017) (“Not only did 

[d]efendant’s statement fail to describe the specific exceptions that might apply, it failed to acknowledge the existence 

of any exceptions by asserting that [d]efendant was required

to report any debt forgiveness.”) (internal quotation marks 

omitted); Good v. Nationwide Credit, Inc., 55 F. Supp. 3d 742, 

746–47 (E.D. Pa. 2014) (holding that the statement that the

creditor is “required to file a form [1099-C] with the Internal 

Revenue Service for any cancelled debt of $600 or more” is 

not entirely accurate because it fails to notify the debtor of 

exceptions to the reporting requirement). Neither case helps 

our plaintiffs. Each involved a debt-collection letter that

mischaracterized a mere possibility as a certainty. That’s not 

so here. The law-firm collection letters merely signaled as a 

general matter that tax consequences are a possibility.

There’s nothing misleading about that.

Finally, the plaintiffs hang their hat on Sledge v. Sands, 

182 F.R.D. 255 (N.D. Ill. 1998). The collection letter there

stated: “[U]nder certain circumstances, cancellation or discharge of [a] debt may be considered income” by the IRS and 

state taxing authorities. Id. at 257 (emphases added). The 

district court held that if a majority of debtors receiving this

 

mentary on the FDCPA, 53 Fed. Reg. 50097, 50106 (Dec. 13, 1988). The 

statement in question here simply warns that a settlement “may” have 

tax consequences; it does not say or imply that the debt collector or a 

third party may take an action against the debtor.
10 Nos. 17-2134 & 17-2165

letter would not realize income for the discharged debt, then 

the statement created a misleading impression in violation of

the FDCPA. Id. at 260. This reasoning rests on the faulty

assumption that a debtor receiving this letter would ignore 

the phrase “under certain circumstances” and misconstrue 

“may” to mean “will.” We do not find Sledge persuasive.4

In short, the § 1692e claims were properly dismissed on 

the pleadings. The tax-consequences warning is literally true

and not misleading under the objective “unsophisticated 

consumer” test. 

AFFIRMED.

 

4 The plaintiffs also analogize to several FTC Act cases from the 1950s 

and 1960s challenging deceptive advertisements promoting cures for 

baldness and fatigue. See, e.g., Erickson v. FTC, 272 F.2d 318, 319–21 (7th 

Cir. 1959) (involving an ad falsely claiming “without qualification” that a 

product would cure baldness); J.B. Williams Co. v. FTC, 381 F.2d 884, 890–

91 (6th Cir. 1967) (involving an ad falsely claiming that a treatment 

would cure fatigue in most cases); Keele Hair & Scalp Specialists, Inc. v. 

FTC, 275 F.2d 18, 19–20 (5th Cir. 1960) (involving a similar ad falsely 

claiming that a product would cure baldness in 95% of cases). These 

cases are irrelevant here. The collection letters in this case did not falsely 

claim that a debt settlement would result in tax liability in most or many 

cases.