Can a lender collect on a debt after issuing Form 1099-C to the defaulter? A bankruptcy court says no. A couple failed to pay their home mortgage, and the bank foreclosed, issuing them a 1099-C showing debt discharge income of $5,000 as income. The bank sued them for the shortfall, and they later filed for bankruptcy. The bankruptcy court ruled that the insurance of the 1099-C by the bank barred any later collection efforts (Reed, D.C., Tenn.). But the other courts have disagreed, pointing out statements in IRS rulings that agency regulations do not prohibit subsequent collection activated by lenders. Eventually, a higher Court will have to step in and settle the dispute.