Check out this site educationcenter2000.com It says that 3rd party debt collectors cannot collect on any debts that have been charged off.The reason is once a bank or cc company list an account as a charge off they claim it as a tax write off and once they do this 3rd party debt collectors can't legally collect a dime of this charged off debt.
That statement is not complete, 3rd party collections are legal, and even the original creditor can collect on a charge off, they just must record the payment as a recapture of a previous bad debt (for income tax purposes).
When it comes to the irs nothing is that simple.If the oc claims the charge off for tax purposes i don't think the oc would then try to recapture the charge off account.If the oc sells a 2,000 charge off to a 3rd party collector for 100.00 the oc could then claim 1,900.00 as a charge off account.If the 3rd party debt collector collects the full amount of the 2,000 charge off they then would have to claim the 1,900.00 charge off as income .2,000.00 they collected minus the 100.00 they paid the oc.If the 3rd party collector settles the charge off account with the debtor for 1,500.00 the 3rd party collector would then claim 1,400.00 as income and the debtor would have to claim 500.00 as income.
Sorry to have to disagree with you Peeper but that's not quite the way it works. Here is why. Under 2650-P 3rd party debt collectors may not submit a 1099-c unless they know that the original creditor has not filed a 1099-C. The debtor/taxpayer must be informed by the filer of the 1099-c that they have filed the document with the IRS. If the debtor can prove that he disputed the debt then he is not liable under IRS law. So there is another reason to dispute the debt. If a creditor fails to file a 1099-c at the time of the charge off and he is reported for failure to do so by the taxpayer then the creditor is subject for penalties ranging from $50.00 up to $250,000 depending on their degree of non compliance with the law. They can be reported by calling 1-800-irs-1040
So what happens if the oc files a 1099 with the irs?Does the debtor then have to claim the charge off as income?If the answer is yes than can this charge off debt still be collected by a 3rd party collector?
Yes, the debtor must claim the CO'd amount as taxable income. A 3rd party can still make collections efforts. If the debtor pays the CA, then they offset their income by the amount paid. And yes, the difference between the cost paid for a debt, and what the collect is the gross income, as per your example.
