Between a Rock and Hard Place: Debt Collection, Consumer Remediation and Tax Consequences

In recent years, debt collection has become a focal point for regulatory oversight and government enforcement actions. The Consumer Financial Protection Bureau (CFPB) considers debt collection to be a priority and scrutinizes the conduct of debt collectors for violations of the Fair Debt Collection Practices Act (FDCPA) and unfair, deceptive, or abusive acts or practices (UDAAPs) under the Dodd-Frank Act. (CFPB, Fair Debt Collection Act Practices Act Annual Report (2017)). Among the many concerns facing debt collectors is whether and how to advise consumers of the potential tax consequences of settling a debt for less than the full amount due. While such an outcome should be a boon for a consumer, settling a debt can lead to unanticipated tax consequences for struggling consumers. Notwithstanding the potential for consumer harm, courts have taken the position that incorrectly advising a consumer of potential tax consequences for settling a debt can violate the FDCPA—and courts have further held that there is no affirmative obligation for a creditor to inform a consumer of such tax consequences.

Originally published in Bloomberg BNA; reprinted with permission.