Thanks to Consumerist, and this article they wrote about this new collection agency scam, and what you should do about it.

Basically, there are desperate collection agencies buying up zombie debts at pennies on the dollar, then tacking on an insame amount of late charges, interest and other fees, then “forgiving” the debt as a tax write off, and sending you a 1099-C tax form. This tax form requires you to pay taxes on the “forgiven” debt.

There are a couple of questions to address here:

- Is this legal? It may or may not be depending on which state you live in. We know that the forgiven amount has to be less than the original amount of the debt. So, if you only owe $100, but they tacked on another $200 in fees, and they forgive $300, immediately seek legal help to alleviate the situation.

- Is it morally right? No, it’s definitely not morally right. If they are going to attempt to collect an old debt past the statute of limitations for being sued on old debts, then they need to do it the REAL way. This is just some cute way of trying to screw you over in the process of them getting a tax write-off. They are still morally and legally allowed to collect on the debt, but they shouldn’t be sending you 1099-C forms if they haven’t even tried to collect from you yet.

Moral of the Story: As soon as you have the money to pay an old debt, PAY IT! It will be more headache for you the longer it floats out there. I understand if you let a debt go because you honestly didn’t have the money to pay it at the time. In fact, I always advise people to pay for necessities before paying unsecured debts. However, the moral thing to do is pay those debts once you do have the money. Just because the statutes say you can’t be sued on those debts anymore, doesn’t mean you should just forget about them. They will only cause you more problems in the future. This is a great example of that.