Consumer Finance Insights
January 20, 2017

First Circuit: Sending Form 1099-A Post-Chapter 7 Discharge Does Not Violate the Discharge Injunction

On December 14, 2016, the United States Court of Appeals for the First Circuit affirmed the New Hampshire Bankruptcy Court and District Courts’ findings that a mortgage lender sending Internal Revenue Service Form 1099-A to a debtor/homeowner post-Chapter 7 discharge does not violate the discharge injunction.  In the case at issue, Bates v. CitiMortgage, Inc., No. 16-1228 (1st Cir. 2016), the Debtors went into bankruptcy and the mortgage lender foreclosed on their mortgage.  At the end of the tax year the mortgage lender sent Form 1099-A in the mail to the Debtors alerting them that the foreclosure sale of their home might have tax consequences.  The Debtors sued the mortgage lender, claiming that the sending of Form 1099-A was a coercive attempt to collect on the mortgage debt, thereby violating the discharge injunction.

In order to prove a discharge injunction violation, a debtor needs to establish that a creditor “(1) has notice of the debtor’s discharge . . .; (2) intends the actions which constituted the violation; and (3) acts in a way that improperly coerces or harasses the debtor . . . .” Under certain circumstances, a debtor might try to claim—as the debtors in Bates did—that an attempt to collect a debt that a creditor knows has been discharged in bankruptcy is an example of a party acting in a way that “improperly coerces or harasses the debtor.” Both the New Hampshire Bankruptcy Court and the District Court found, and the First Circuit affirmed, that the sending of Form 1099-A is not a collection attempt.  They reasoned that Form 1099-A only conveys tax information, and the Debtors may have had reportable income or loss because of the foreclosure.  The courts concluded that, because Form 1099-A conveys information and does not threaten any action, it cannot be a violation of the discharge injunction.

Financial services firms should take note of this case as they contemplate how they engage with borrowers following a bankruptcy, because it supports the proposition that informational tax documents sent by creditors do not violate the discharge injunction.