Can Credit Card Companies Sell Your Account & Then Send You a 1099-C?

Failure to pay back a credit card debt you owe can lead to serious negative consequences. A debt deemed uncollectable can be considered as income and have a direct effect on the amount of income taxes you have to pay. A credit card company can sell the debt to a collection agency and issue a Form 1099-C to you for the amount still owed on the account after deducting the amount received when it sold the debt. The debt remains valid until you pay it off or reach a financial settlement.

A credit card company issues a 1099-C once it believes the money will not be paid back and it will be stopping its direct collection efforts to try to get you to pay back the money. The 1099-C form is issued for debts with an outstanding balance of $600 or more. The credit card company will also send the IRS a copy of the 1099-C form to alert the IRS to the charge-off. The IRS treats written-off credit card balances as “forgiven” or “canceled” debt that can increase your personal income for tax purposes. The 1099-C is strictly for tax purposes and does not affect your obligation to pay off the debt.

Credit card companies will typically sell the debt to a collection agency that specializes in handling severely delinquent accounts to get at least a nominal amount of money to offset their financial loss. The collection agency can continue to try to collect on the debt even if you were issued a 1099-C by the credit card company.

Receiving a 1099-C does not automatically mean that you will be liable to pay income taxes on the uncollectable amount. Credit card balances written-off while you are financially insolvent and unable to pay your bills, or if you have declared bankruptcy, will usually not be considered as income. The IRS requires that Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness," be filed along with the 1099-C when filing taxes. Form 982 lists debts and assets the IRS uses to determine your ability to pay back the credit card company and if you are eligible to receive an exemption from counting the written-off amount as income.

The adjustment to your federal income tax filing can also affect the amount you might have to pay on a state level. For example, New York state uses the adjusted gross income from your federal income tax return as the base income that will be taxed by the state. Any increase in the AGI for federal purposes could also increase the tax liability for New York state taxpayers receiving a Form 1099-C. Contact your state’s department of taxation to learn how you could be affected by federal income reporting requirements.