If a creditor loses the right to pursue collection, do they have to change my credit status?

Asked July 24, 2014, 11:26 AM EDT

I recently went to the bank to see about getting a mortgage loan, they said I would need to take care of the repo debt with GM Financial. The account still shows in collections even after I received the 1099-C. I contacted GM and they said that it still was a collections account and wanted to settle instead of changing the status with Equifax. Can they continue to refuse to change the status even though they have claimed this as a loss with the IRS? I understand that when they issue the 1099-C that they lose the right to pursue collections. If they lose the right to pursue it as a collection shouldn't they be required to change the status?

Oakland County Michigan

1 Response

Per Helena Fleming, Extension Educator with Michigan State University Extension:

The law is very grey on the issue. The company may have issued a 1099-C because according to debt laws after 6 months and more than $600 they should. It does not however release the debtor from the obligation to pay. Based on what I found, the creditor can ask the debtor to settle the debt.

I looked through about 20 or so cases about Schedule-C challenges and all of them sided with the creditor. The creditor can reissue the 1099-C saying it was a mistake because they thought they were required to do, but the law is not explicit on whether or not the person has to pay it.

I did see how if the 1099-C is issued, unless the person files for bankruptcy protection, then no they don't have to pay it back. Unfortunately, I didn't see where even in the law it says the person doesn't have to pay it back.

It’s definitely an issue for consumers that a creditor gets to write off the debt but wants the person to settle a debt that has been written off.

I would suggest disputing the issue with the Credit reporting companies by sending in the 1099-C form to them directly to see how that works out.

Now, if it is strictly mortgage debt you may want to refer to the Mortgage Forgiveness Debt Relief Act of 2007 - http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-

If the consumer still has problems, they may want to talk to a real estate attorney. They need to reach out and speak to legal counsel.

Bankruptcy or being considered insolvent were the only real categories that I saw where a creditor couldn't force payment to have the status changed on the credit report.