Seventh Circuit Holds That Letter Stating That Debt Collector “May File a 1099C Form” if It Discharges Debt May Have Violated FDCPA

The United States Court of Appeals for the Seventh Circuit recently held that a dunning letter that stated that the debt collector “may file a 1099C form” if the debtor paid a discounted amount could constitute a violation of the Fair Debt Collection Practices Act (“FDCPA”) if the debt collector was discharging less than $600 in principal.  See Heredia v. Capital Mgmt. Servs., L.P., 2019 WL 5849901 (7th Cir. Nov. 8, 2019).  In the case, the debt collector sent a letter to the debtor that provided a number of settlement options in which the debt collector agreed to discharge a certain amount of the debt if the debtor made payments by certain dates.  In each option, the amount of discharged debt would have been less than $600.  The letter then stated that “[s]ettling a debt for less than the balance owed may have tax consequences and Discover may file a 1099C form.”  The debtor brought this action, claiming that the language regarding the 1099C was misleading in violation of the FDCPA.  The debt collector moved to dismiss the action, and the District Court granted the motion.

On appeal, the Court reversed.  The Court held that a debt collector only needs to file a 1099C if it discharges more than $600 if principal.  In this case, all of the settlement offers presented to the debtor in this letter would have resulted in a discharge of less than $600, so the debt collector would not be required to file a 1099C under any circumstances.  “In regard to the November 11 letter, therefore, [the debtor] could plausibly allege that it is, in fact, misleading to state that Discover may file a Form 1099C, when it never would.”  Accordingly, the Court reversed the District Court and reinstated the action.  In doing so, the Court also distinguished other cases in which courts found that letters that contained language that settlement may have tax consequences did not violate the FDCPA because “[s]ettlement may or may not have tax consequences depending on the financial situation of the debtor, and that information is only in the hands of the debtor herself, and not the debt collector.”  In this case, however, “the debt collector has within its own knowledge all of the information it needs in order to know whether such a form will or will not be required.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Anthony Lombardo at alombardo@riker.com.