CitiMortgage, Freddie Mac Off Hook for 1099 Sent on Discharged Debt

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By Diane Davis

An Internal Revenue Service Form 1099 sent to Chapter 7 debtors alerting them that a foreclosure on their home might have tax consequences isn’t an attempt to collect a debt ( Bates v. CitiMortgage, Inc. , 1st Cir., No. 16-1228, 12/14/16 ).

Judge O. Rogeriee Thompson of the U.S. Court of Appeals for the First Circuit Dec. 14 concluded that the IRS Form 1099-A sent to the debtors “provides information,” and doesn’t demand payment or threaten any action.

The form wasn’t coercive even though it contained false information, the court said. Lender Federal Home Loan Mortgage (Freddie Mac) incorrectly checked the box on the form showing that the debtors were personally liable for the debt, but the form didn’t create tax liability for the debtors or any other consequences, the court said.

CitiMortgage, Inc., which made the original loan to the debtor, made the situation worse when a representative gave the debtors wrong information over the phone that the debt hadn’t been discharged in bankruptcy, the court said. However, the “subjective feeling of coercion” isn’t enough to prove a violation of the discharge injunction, the court said. The debtors also didn’t present evidence that the form was objectively coercive, the court said.

Debtors Cathy and Timothy Bates’s home in New Hampshire was secured by a mortgage from CitiMortgage. The debtors filed for Chapter 7 bankruptcy in which their nonexempt assets were liquidated by a trustee, and the proceeds were distributed to creditors. Their mortgage debt was discharged in 2009. Subsequently, the debtors entered into a loan modification agreement with CitiMortgage in which they could avoid foreclosure and stay in the home as long as they made payments. After they stopped making payments, CitiMortgage foreclosed and the debtors moved out.

Shortly thereafter, the debtors received a Form 1099-A listing Freddie Mac as the lender and stating that the principal balance outstanding was $194,624, and the fair market value of the home was $168,000. Box five on the form was checked indicating that “the borrower was personally liable for the repayment of the debt.”

The debtors reopened their bankruptcy case and sued CitiMortgage and Freddie Mac for attempting to collect on a discharged debt in violation of the Bankruptcy Code’s discharge injunction.

The bankruptcy court found the form didn’t give the debtors any objective basis to believe the lender was trying to collect a discharged mortgage debt, and the district court affirmed.

The form stated that because of the foreclosure, "[y]ou may have reportable income or loss,” but it didn’t demand payment or threaten any action, the appeals court said.

Judges Sandra L. Lynch and David J. Barron joined the opinion.

Terrie Harman, Kristina Cerniauskaite of Harman Law Offices, represented Appellants Cathy and Timothy Bates. Gregory N. Blase, David D. Christensen of K&L Gates LLP, represented Appellees CitiMortgage, Federal Home Loan Mortgage Corporation.

To contact the reporter on this story: Diane Davis in Washington, D.C. at

To contact the editor responsible for this story: Jay Horowitz at

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