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Ruling on Disclosure in Debt Collection Letters
April 12, 2018

Earlier this month, a West Virginia federal court ruled a disclosure in a debt collection letter regarding potential tax implications for settling a debt did not violate the Fair Debt Collection Practices Act (“FDCPA”) or the West Virginia Consumer Credit and Protection Act (“WVCCPA”).

In Garrettson v. Sentry Credit, Inc. et al., a debt collector sent a collection letter to the plaintiff debtor, offering to settle the debt for less than the amount due. The letter contained the following language:

If, as a result of the settlement, the amount forgiven or canceled on this debt equals or exceeds $600, the IRS may require the creditor to report the amount forgiven or canceled on a form 1099-C. You may receive this form for the year in which the settlement is completed. If you would like advice about the potential tax consequences that may result from this settlement, my client recommends that you consult a tax professional of your choosing. My client does not make any representations about the tax consequences that this settlement may have for you or any reporting requirement that may be imposed.

Plaintiff alleged the debt collector’s notice that a settlement of the debt could result in the creditor issuing a form 1099-C was “purposely confusing and misleading,” and he “felt pressure to pay the whole debt rather than accept a settlement that may be reported” to the IRS. The district court dismissed both claims on a Rule 12(b)(6) motion.

First, the court determined the collection letter’s warning was not misleading or deceptive because the language in the letter was accurate and conditional, and the letter encouraged plaintiff to contact a tax professional. Thus, the letter put plaintiff on notice that the creditor might be required to report the debt forgiveness to the IRS.

Second, the district court rejected plaintiff’s “unconvincing” argument the notice was intended to pressure him to pay the full amount of the debt to avoid IRS involvement. The court explained it was more likely the debt collector included the IRS disclosure so the plaintiff would not be blindsided by receiving a 1099-C or an unexpected tax bill.

You can read the full text of the decision here: Garrettson v. Sentry Credit, Inc. et al., No. 5:17-cv-04171, 2018 WL 1659477 (S.D.W. Va. Apr. 3, 2018).

Consumer Finance Tai Shadrick Kluemper