Managing Federal Receivables Chapter 7 Termination of Collection Action, Writeoff and CloseoutCancel

1
Managing Federal Receivables Chapter
7 Termination of Collection Action, Write-off
and Close-out/Cancellation of Indebtedness

• Good Morning Students.
• I am your Professor.
• In this tutorial I will teach you how to be a
  good terminator, writer-offer,
  closer- outer and discharger of debt.
• YOU WILL FOLLOW MY INSTRUCTIONS AND LEARN ALL
  THE RULES, OR YOU MAY BE TERMINATED, WRITTEN-OFF
  OR DISCHARGED!
• Now let us begin

2
Overview The Basic Concepts
WHAT ARE THE THREE BASIC CONCEPTS INVOLVED WHEN A
DELINQUENT DEBT BECOMES UNCOLLECTIBLE?

• The three basic concepts are
• the program (and legal) concept of ceasing
  collection action on the debt.
• the accounting concept of reducing the value of
  the asset (the debt) to zero.
• the income tax concept of viewing the
  uncollectible debt as income to the debtor.
• While all three concepts concern debts that
  remain uncollected, each concept is governed by
  separate rules. Accordingly, it is important to
  understand the differences among the concepts in
  order to realize which rules apply.

3
Overview - The Program Concept

• WHAT IS THE PROGRAM CONCEPT?
• There is an affirmative responsibility to try to
  collect delinquent debts. The agency must follow
  appropriate rules when it ceases active
  collection action on a delinquent debt. Active
  collection is when the agency is trying to
  collect the debt using all available and
  appropriate debt collection tools such as demand
  letters, garnishment, foreclosure, litigation, or
  cross-servicing at Treasurys Financial
  Management Service.
• The two types of ceasing active collection are
• Termination of collection This is a decision by
  the agency to permanently cease active collection
  on a debt.
• Suspension of collection This is a decision by
  the agency to temporarily cease active collection
  on a debt.

4
Overview The Program Concept

• WHAT IS PASSIVE COLLECTION?
• When an agency ceases active collection, it may
  decide to continue passive collection. Passive
  collection is when the debt is no longer being
  actively collected, but may remain secured by a
  judgment lien, in TOP, scheduled for future
  sale, and/or reported to a credit bureau.

5
Overview The Accounting Concept

• WHAT IS THE ACCOUNTING CONCEPT?
• The accounting concept is known by the term
  Write-off. Write-off is the accounting action
  that results in reporting the debt receivable as
  having no value on the agencys financial reports
  and on certain management reports such as the
  Treasury Report on Receivables.

6
Overview The Accounting Concept
More on the accounting concept Write-off
actions are governed by OMB Circular No. A-129.
Under the OMB Circular, when a debt is written
off, the agency must classify it in one of two
categories

• Currently not collectible debt classification
  after write-off used when agency intends to
  continue debt collection action (either passive
  or active).
• Close-out debt classification after write-off
  when agency does not intend to continue any debt
  collection action.
• Though the classifications of write-off are
  based on whether or not collection action will
  continue, the rules of write-off are different
  than those of terminating collection action
  (ceasing active collection). Accordingly
  write-off does not always mean that collection
  action has ended.

7
Overview The Income Tax Concept
What is the Income Tax Concept?

• Under the Internal Revenue Code and IRS
  regulations, creditors must report to the IRS
  certain circumstances when a debt is no longer
  being repaid. The creditor reports this
  information on a form 1099-C Cancellation of
  Debt, which the IRS uses to determine if the
  cancellation or discharge should be considered
  taxable income to the debtor.
• Generally, cancellation or discharge of
  indebtedness occurs after the agency stops all
  collection action, or the agency cannot pursue
  collection action.

8
Overview The Income Tax Concept

• More on the income tax concept
• Under IRS regulations there are 8 identifiable
  events that result in cancellation of
  indebtedness. Examples of identifiable events
  include compromise for inability to pay,
  discharge in bankruptcy, and ceasing all
  collection action (active and passive).
• Specific instructions on what must be reported
  can be found in the IRS Instructions for Forms
  1099-A and 1099-C.

9
Overview

• Students!
• I have finished my overview.
• You now know there are three basic concepts
• the program (and legal) concept,
• the accounting concept,
• the income tax concept!
• You now know that each concept is different, with
  different rules.
• It is time to learn more about each concept.
• Click here to proceed to the next part!