Less is More: Second Circuit Holds that Failure to Disclose Tax Consequences of Settlement Does Not Violate FDCPA

The Second Circuit has resolved a debt collector’s obligation to disclose the tax consequences of settlement.  The Second Circuit recently ruled that a debt collector does not violate the FDCPA if it fails to advise a consumer of the potential tax consequences of a settlement.  In Altman v. J.C. Christensen & Assocs., the collection agency sent a settlement letter to the consumer which provided several options for settlement, including: “1. Settle your account now for a lump-sum payment of $3,155.43.  That is a savings of 48% on your outstanding account balance.  2. Extend your time and settle your account in three payments of $1,314.76.  This is a savings of $2,123.85 on your outstanding account balance.”  Altman v. J.C. Christensen & Assocs., 2015 U.S. App. LEXIS 7980, * 2-3 (2d Cir. May 14, 2015).  The consumer contended that J.C. Christensen violated the FDCPA by failing to advise him that the forgiven debt might be taxable under the Internal Revenue Code.  In affirming the district court’s ruling in favor of the collection agency, the Court made the following points:

• The letter plainly stated the percentage saved was on the outstanding balance.  Taken in context with the letter, the fact that the letter did not disclose the debtor might then have to pay taxes on the amount saved in not deceptive.
   
• The language of the FDCPA does not require a debt collector to make any affirmative disclosures of potential tax consequences when collecting a debt.
   
• Requiring a debt collector to disclose potential collateral consequences of a settlement is far afield from the broad mandate of the FDCPA to protect from abusive debt collectors.
  
  

In contrast, debt collectors should also be aware that the disclosure of information as to tax consequences, if not done correctly, can land them in hot water. In Good v. Nationwide Credit, 55 F. Supp. 3d 742 (E.D. Pa. 2014), a district court in the Third Circuit denied a collection agency’s motion to dismiss where the letter similarly offered to “settle his account of $613.03 for $183.90, representing a savings of $429.13.”  The letter in that case, however, went a step further and included a notice that “GE CAPITAL BANK is required to file a form 1099C with the Internal Revenue Service for any cancelled debt of $600 or more.  Please consult your tax advisor concerning any tax questions.”  The Court held that the additional language of the notice could state a claim for violation of the FDCPA because: it did not accurately reflect controlling law, could be construed as deceptive and misleading, and was a material representation.  The court stated that “the least sophisticated consumer may reasonably believe that in order not to be reported to the IRS, he or she must pay enough on the alleged debt so that a balance of less than $600.00 remains regardless of whether the event is reportable, or any exception applies.”