In a case first highlighted by Smith Debnam a District Court judge in New York has denied a defendant’s motion to dismiss after it was sued for allegedly violating the Fair Debt Collection Practices Act by indicating that settling a debt for less than the full amount “may” have tax consequences for the plaintiff.
A copy of the ruling in Leonard v. Capital Management Strategies, LP can be accessed by clicking here.
The plaintiff received a collection letter from the defendant. The letter included an offer to settle the debt for less than the full amount that was owed. The total amount of debt forgiveness was less than $600, the threshold over which an individual has to file a form 1099-C with the Internal Revenue Service. The letter also included the following statement: “Settling the debt for less than the balance owed may have tax consequences and [the creditor] may file a 1099C form.”
In seeking to dismiss the suit, the defendant argued the plaintiff lacked standing and that the statement did not violate the FDCPA. By specifically alleging violations of Section 1692e of the FDCPA, and applying the precedent of Cohen v. Rosicki, Rosicki & Associates, the judge determined the plaintiff had suffered a concrete injury and, thus, had standing to file suit.
With regard to the FDCPA claim, by using the word “may” in the statement about the 1099-C, the defendant or the creditor “might choose to report the cancelled debt to the IRS, and the debtor might face adverse tax consequences” according to Judge Geoffrey Crawford’s ruling.
Judge Crawford acknowledged there could be good reason for using general language, because there are times when detailing all of the technicalities of a potential topic can be overwhelming and intimidating. In taking a cue from Velez v. Enhanced Recovery Company, a least sophisticated debtor, in this case, might believe that the defendant “retained complete discretion in whether to report.”
