12.1.3 Discharge of the Debt

A debt is discharged when it is clear that the debt will never have to be paid.1  Recourse debt is not discharged to the extent that there is a deficiency judgment or an unpaid deficiency that survives the foreclosure judgment.2  In some cases, the debt may not be discharged until the statute of limitations has expired.3  The applicable statute of limitations may be a complex issue.4  A creditor who sells credit card debt to a “debt buyer” may write off the debt and issue a Form 1099-C. However, in such cases, the debt is not discharged because the debt buyer usually continues to try and collect the debt. The tax attorney can provide copies of the new collection notices or other attempts at collection to prove that no discharge has occurred.

• 1Friedman v. Comm’r, 216 F.3d 537 (6th Cir. 2000); Cozzi v. Comm’r, 88 T.C. 435 (1987).
• 2See, e.g., Aizawa v. Comm’r, 99 T.C. 197 (1992), aff’d, 29 F.3d 630 (9th Cir. 1994); Webb v. Comm’r, T.C. Memo 1995-486.
• 3See Coburn v. Comm’r, T.C. Memo 2005-283 (abandonment of collateral on recourse liability, alone, did not extinguish underlying liability).
• 4See, e.g., Portfolio Recovery Assocs., LLC v. King, 927 N.E.2d 1059 (N.Y. 2010).