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Fair Debt Collection: 11.13.9 Costs

The FDCPA provides that a collector is liable to the consumer for costs in the case of any successful action.1291 The use of the words “is liable” in section 1692k(a)(3) strongly suggests the inapplicability of the Federal Rule of Civil Procedure 54(d) standard that gives the court broad discretion as to the awarding costs. Instead, section 1692k(a)(3) makes the award mandatory.1292

Fair Debt Collection: 11.13.10.1 Requirements

The Federal Rules of Civil Procedure require motions for attorney fees and expenses to be filed and served no later than fourteen days after judgment.1308 What is required in this time period is only notice to the court and to the opponent that fees will be sought and a fair estimate of the total fees and expenses claimed.1309 A detailed record of hours and rates, affidavits, time records, fee surveys, and other supporting evidence and briefs may be submitted following the motion for fees, “

Fair Debt Collection: 11.13.10.2 Preparation of the Fee Application

The first step in a successful fee application is preparing a detailed accounting of time spent and work performed on the case.1317 While the Supreme Court has not described the standards for record-keeping in detail, and some courts may accept reconstructed records,1318 contemporaneous time records are by far the preferred practice.1319 Courts may disallow hours claimed if there are no contemporaneous time records, or if those records fail t

Fair Debt Collection: 11.13.11 Appealing Attorney Fee Awards

If the action is successful, but the consumer’s attorney believes the fee award is inadequate, this issue alone may be appealed.1336 The lower court’s fee decision though is only reversible in cases involving an abuse of discretion, which may be a difficult burden to shoulder.1337 If the lower court failed to state valid legal reasons for the reduction from the lodestar, however, the decision should be remanded for an explanation.1338

Fair Debt Collection: 11.14.1 Overview

This section will discuss tax considerations in fair debt collection actions. While it cannot replace a consultation with a knowledgeable tax advisor, it will raise several issues regarding the tax implications of an award or settlement.1342 These considerations may help shape the exact structure of the engagement and settlement to ensure that your client receives an adequate award after tax considerations are taken into account.

Fair Debt Collection: 11.14.2.1 Generally

This section focuses on whether court awards and settlements,1343 including cash awards, cancelled debt, and attorney fees, are taxable income to your client. Generally, all income is subject to tax unless specifically excluded by statute.1344 Most pecuniary awards in the consumer area are taxable, for example, statutory damages, lost wages, penalties, interest, and punitive damages.

Fair Debt Collection: 11.14.2.3 Return of Capital; Reduction of Purchase Price

While certain actual damages in a debt collection harassment case may be taxable, such as lost wages or emotional distress, an exception applies for damages that represent the return of money improperly taken. For example, recovery of wrongfully garnished wages is not taxable income, because the wrongdoer is returning money that has already been subject to tax.

Fair Debt Collection: 11.14.2.4 Physical Injury Damages

In either a court recovery or a settlement, gross taxable income does not include damages (other than punitive damages) “on account of” personal physical injuries or physical sickness.1349 To exclude these damages from gross income a taxpayer must demonstrate that the underlying cause of action giving rise to the recovery was based on tort or tort-type rights.1350 State law decides whether a tort-type injury is involved.1351

Fair Debt Collection: 11.14.2.5.1 The general rule

Cancelled debts are taxable income unless a statutory exemption or other exclusion applies. Income from cancelled debts1357 is taxable because the debtor realizes an accession to wealth when the debt is cancelled.1358 Receipt of loan proceeds is not taxable because of the corresponding obligation to repay. When that obligation is cancelled, the debtor has an increase in wealth which is subject to tax.1359

Fair Debt Collection: 11.14.2.5.2 Statutory exemptions

There is no taxable income to the debtor for a cancelled debt when a statutory exemption applies.1361 These exemptions include when the debt is cancelled in a bankruptcy case; when the debtor is insolvent; for cancelled student loans in certain circumstances; when the loan relates to a primary residence and was cancelled (or an agreement to cancel existed) before January 1, 2026;1362 and when the cancellation relates to a purchase price reduction between a bu

Fair Debt Collection: 11.14.2.5.3 Non-statutory exclusions

In many consumer cases, the amount of a debt or even the existence of a debt that arose in connection to a consumer transaction is disputed, for example, when the debtor does not owe the debt, is the victim of identity theft, or when credit card charges were unauthorized. When there is a reasonable dispute as to the validity of the debt, its cancellation is not income.1370 This doctrine usually applies to unliquidated, disputed debts.1371

Fair Debt Collection: 11.14.2.5.4 Exception for operation of law; TILA rescission

Truth in Lending Act rescission of a home mortgage is an important example of when cancelled debt is not taxable income. Since the statute rescinds the mortgage debt, it is legally wiped out and not considered income when it is cancelled. However, the consumer has to recognize as income any deductions previously claimed for the interest paid on the mortgage.1375

Fair Debt Collection: 11.14.2.7 Allocation Between Taxable and Non-Taxable Portions

Sometimes a settlement agreement will allocate the recovery to non-taxable and taxable portions. If this allocation is challenged, the Internal Revenue Service (IRS) and courts will consider all facts, including the allegations contained in the complaint, the evidence presented, the arguments made in the court proceeding, and the intent of the payor to determine the proper allocation.1385

Fair Debt Collection: 11.14.3.1 Generally

An important caveat: this section seeks to place attorney fee tax issues in a coherent context. Tax laws often change, some issues discussed here are unresolved, and each client’s tax situation is different. The particulars of an individual’s taxes and tax planning must be based on a knowledgeable tax professional’s analysis of the facts specific to that individual.

Fair Debt Collection: 11.14.3.4 No Tax Is Owed on Fees in “Civil Rights” Cases

In certain “civil rights” cases, including some consumer claims, clients may deduct attorney fees and costs “above the line,” which means that the client reports only their net income—that is, the amount of the award the client keeps.1413 This eliminates the harsh result where the consumer’s tax liability may increase, even though the fee award is received by the consumer’s attorney.

Fair Debt Collection: 11.14.3.5 Taxability of Fees in Class Actions

In class action suits, the fee award is not income to the class representatives or class members when they are paid directly to the class counsel, are part of an opt-out class action lawsuit, and the class representatives and members do not have a separate contingency fee or retainer agreement with counsel.1417 This rule may not apply to “opt-in” class action lawsuits.1418

Unfair and Deceptive Acts and Practices: 11.4.2.8.2 Clauses that have not been enforced

Some courts have found that consumers suffered no “ascertainable loss of money or property” where an unfair, deceptive, unenforceable, or illegal provision was included in a contract but was never used nor had any impact on the consumers.335 Similarly, a court may find that including authority to charge an illegal fee in a contract does not cause a loss if the fee is never actually imposed.336 A New Jersey court held that an extended vehicle service contract’s coverage restrictions did not cause

Unfair and Deceptive Acts and Practices: 11.4.2.8.3 Temporary losses

A temporary deprivation of property345 or loss of the use of money346 can satisfy a damage requirement. A loss meets an injury requirement whether or not it remains uncompensated.347 Slow payment of owed money is loss of money or property, even if the money is eventually paid, because the consumer has lost the use of the money and may have incurred expenses in trying to collect it.348

Unfair and Deceptive Acts and Practices: 11.4.2.8.4 Delivering product different than consumer bargained for

An ascertainable loss requirement is satisfied if the consumer has purchased an item that is different from or inferior to that for which the consumer bargained.354 Some courts refer to this as the “benefit of the bargain” standard,355 a term used in fraud356 and warranty law.357 The ascertainable loss is then the difference between the value of the product as represented and the value of the product

Unfair and Deceptive Acts and Practices: 11.4.2.8.4a Where consumer would not have purchased the product but for the misrepresentation

Even if the product is worth what the consumer paid for it, many courts recognize that the consumer has suffered sufficient injury to assert a UDAP claim if the consumer would not have purchased the product but for the misrepresentation.380 The view that paying a price for something that has value but that the buyer does not want is an injury is consistent with longstanding principles of unjust enrichment and restitution.381 Thus, a consumer who buys a product because of a misrepresentation—for