A new federal report shows consumer debt is once again on the rise, reversing a long recession-spurred decline.

The latest monthly Federal Reserve report showed that revolving credit, made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December, rising nearly $3 billion to $801 billion. December marked the fourth straight monthly increase in revolving credit spending, reversing a recession-spurred decline.

That followed a $5.5 billion jump in November, when the Christmas holiday season kicked off during Thanksgiving weekend. That November increase amounted to an annual rate increase of 8.4 percent. While the Federal Reserve report is good news for Alabama and other states, which rely on consumer spending to stimulate their economies, it’s not good for those folks who remain overburdened by heavy debt loads, said Bill Hardekopf, president of Birmingham-based Lowcards.com, a consumer financial education website.

“These credit card debt numbers are a concern but it’s too early to tell whether we are all falling back into the trap of spending more than we can afford,” Hardekopf said. “People certainly charged more this Christmas than last year.”

Hardekopf said the rise in credit card spending could be a positive sign that consumers are more confident in the economy, which was battered by a three-year economic downturn that began in 2007. But, he added, “it could mean that people are struggling and have to rely on using their credit card to make ends meet.”

“Consumers are going into 2012 with higher credit card debt but the same wages,” he said. “If consumers have a hard time paying this down, we might see delinquencies and defaults start to increase by spring.”

Hardekopf, author of The Credit Card Guidebook, said people need to be cautious when spending on credit cards. He said new federal rulings have cost banks and credit card issuers hundreds of millions of dollars, which may have indirectly led to higher rates and fees for consumers.

“Whenever banks incur additional costs or have their revenue stream cut in one area, they typically make up that money by raising the rates or fees in another area,” Hardekopf said. “And we, the consumers, will usually be the ones paying the price for those additional rates or higher fees.”

Two other challenges loom that could come back to bite those who overdo it on credit card spending as the economy improves: an unemployment rate that remains historically high and gasoline prices that are on a pace to this summer surpass the record $4.05 Alabama saw in September 2008.

“Even though the unemployment rate is dropping, it remains historically high and there are still a number of people out of work,” Hardekopf said. “Gasoline may be the only fly in the ointment that hurts an economic recovery. When gas prices go up, everything goes up.”

Debt elimination tips:

Raise your credit  score. Pay your bills on time, pay down your debt and limit your credit  applications. This will this help you qualify for the best terms and  interest rates on loans and save thousands of dollars over your  lifetime.

Set up a plan for daily spending. Save for the bigger purchases and occasional splurge without resorting to plastic. If  married, make sure both spouses have input. Eat out less or use coupons, and immediately apply the money you saved to your credit card balance.  If you have multiple credit cards with balances, pay off the balance  with the highest interest rate and then move to the next-highest rate.

Set up an emergency fund. All couples should have an emergency fund of six to eight months’ worth of living expenses held in a safe place such as a money-market fund. Make savings consistent and untouchable by  setting up an automated deposit from your paycheck into your savings  account.

Monitor your accounts. Even if you divide up  bill-paying and investing duties, both parties should be able to easily  access accounts to know what is going on with your money.

Source: Bill Hardekopf of Lowcards.com

Only 54% of Americans have more emergency savings than credit card debt, according to a new poll released today by Bankrate.com. One in four Americans (25%) has more credit card debt than emergency savings and 16% have neither credit card debt nor emergency savings.

Bankrate’s monthly Financial Security Index held at 97.3, unchanged from January and tied for the highest level since June 2011. Any reading below 100 indicates a lower level of financial security compared with 12 months earlier.

Despite four straight months of improving sentiment, consumers’ overall financial situation is still seen as negative. Twenty-seven percent of Americans report a lower level of financial security now versus one year ago and 24% report a higher level. Thirty-eight percent of Americans are less comfortable with their savings now compared with one year ago; only 14% are more comfortable.

“Emergency savings remains a problem area for many Americans, which leaves them only one unplanned expense away from having high-cost debt,” said Greg McBride, CFA, Bankrate.com’s senior financial analyst. “Long-term unemployment, stagnant wage growth and rising household expenses are all contributing to this trend. As difficult as it may be to boost savings, having an adequate emergency savings cushion is critical to maintaining financial stability, and Americans need to find ways to sock away more cash for a rainy day.”

Additional findings included:

Job Security

Consumers are slightly positive, with 20% feeling more secure than one year ago and 19% feeling less secure (up from 17% in January).

Savings

Consumers have reported less negativity about their savings in each of the past three months, with fewer feeling less comfortable and more feeling about the same as 12 months ago.

Debt and Net Worth

Both were little changed from January and maintain essentially neutral readings.

Credit Card Debt vs. Emergency Savings

Households with income of $75,000 or more per year, college graduates and retirees are the most likely to have more in emergency savings than credit card debt.

Parents are the most likely to have more credit card debt than emergency savings.

Those most likely to have neither credit card debt nor emergency savings are households with income of less than $30,000 per year, those with a high school education or less and the unemployed.

In a similar Bankrate poll conducted in February 2011, 52% of Americans had more emergency savings than credit card debt. Twenty-three percent had more credit card debt than emergency savings and 19% had neither credit card debt nor emergency savings.

The new study was conducted by Princeton Survey Research Associates International (PSRAI) and can be seen in its entirety here: http://www.bankrate.com/finance/consumer-index/survey-shows-savings-triumphs-debt.aspx.The PSRAI February 2012 Omnibus Week 1 obtained telephone interviews with a nationally representative sample of 1,006 adults living in the continental United States. Telephone interviews were conducted by landline (603) and cell phone (403, including 174 without a landline phone). The survey was conducted by Princeton Survey Research Associates International (PSRAI). Interviews were done in English by Princeton Data Source from February 2-5, 2012. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error for the complete set of weighted data is plus or minus 3.7 percentage points.

About Bankrate, Inc.Bankrate is a leading publisher, aggregator and distributor of personal finance content on the Internet. Bankrate provides consumers with proprietary, fully researched, comprehensive, independent and objective personal finance editorial content across multiple vertical categories including mortgages, deposits, insurance, credit cards, and other categories, such as retirement, automobile loans, and taxes. The Bankrate network includes Bankrate.com, our flagship website, and other owned and operated personal finance websites, including CreditCards.com, Interest.com, Bankaholic.com, Mortgage-calc.com, CreditCardGuide.com, Nationwide Card Services, InsuranceQuotes.com, CarInsuranceQuotes.com, InsureMe, Bankrate.com.cn, CreditCards.ca, NetQuote.com, and CD.com. Bankrate aggregates rate information from over 4,800 institutions on more than 300 financial products. With coverage of nearly 600 local markets in all 50 U.S. states, Bankrate generates over 172,000 distinct rate tables capturing on average over three million pieces of information daily. Bankrate develops and provides web services to over 80 co-branded websites with online partners, including some of the most trusted and frequently visited personal finance sites on the Internet such as Yahoo!, AOL, CNBC and Bloomberg. In addition, Bankrate licenses editorial content to over 500 newspapers on a daily basis including The Wall Street Journal, USA Today, The New York Times, The Los Angeles Times and The Boston Globe.

www.bankrate.com

The trove of statistics and reports released last week point to an economy on the mend.

U.S. homebuilders are feeling increasingly optimistic about their battered industry. Consumer spending is on the rise. America’s factories are humming again. Stocks, in turn, have been climbing.

Not so fast, cautions Bruce Bittles, chief investment strategist for the wealth management firm Robert W. Baird & Co. and a devil’s advocate.

It’s not that Bittles disagrees with the upbeat but backward-looking numbers coming out of Washington lately.

“Things are starting to feel better, and the stock market is a representation of that,” he said during an hourlong talk in Charleston last week for Milwaukee-based Baird’s local advisers and clients.

But peering down the road to recovery, the veteran market watcher has spotted some dangerous potholes ahead. He’s more than a bit “suspect” that the fragile rebound will have legs.

“I’m very skeptical about the next year or two,” he said. “I don’t think we’re out of this yet.”

One big concern for Bittles is consumer spending, which drives two-thirds of the economy. While shoppers have been feeling more confident and throwing more money around lately, especially on big-ticket items such as cars, he’s worried that the spree will be short-lived.

Overall wages have been flat for 18 months and in the red for the past nine months when inflation is factored in. That suggests that personal savings are helping fuel the spending uptick.

“That’s never a good sign,” Bittles said.

The flip side of that same coin is Americans need to save more, as they have through much of the downturn, he added.

Four-letter word

Market experts such as Bittles often are asked by investors what keeps them awake at night.

The threat of war? Inflation? A spike in oil prices? All valid concerns, for sure. But Bittles’ biggest fear goes to the issue that brought the global financial system to its knees in the first place.

“It’s the excess debt in all corners of the economy that keeps me up at night,” he said.

Bittles described debt as “that four-letter word,” literally and figuratively. He called the growing stockpile of taxpayer IOUs “an anchor” on growth because the mounting cost of paying it down “saps everything out of the economy.”

“That’s why we can’t have a sustained boom like we have in years past,” he said.

Greece is the current poster child for spending more than it could pay back, but Bittles says the U.S. is heading down the same path. Where it ends, no one knows.

“Nothing’s been addressed,” said Bittles, who is based in Nashville. “We just keep kicking the can down the road, but the can is getting heavy.”

How heavy? The estimated $15.3 trillion national debt has swelled to about 9 percent of the Gross Domestic Product. That’s on par with Spain.

“And we’re worried about Spain,” Bittles marveled.

Game over?

For all his skepticism, Bittles holds out hope that the debt crisis will get addressed in due time, saying the so-called Great Recession changed the mood of the country.

“I think the game is over,” he said.

He noted that households tightened their belts when the economy tanked, as did businesses.

“Individuals get it. Corporations get it,” he said.

Next up were state and local governments.

Now, it’s Uncle Sam’s turn to slay the debt monster.

Bittles predicted that meaningful reforms could gain traction within three years.

“It’s not going to happen overnight,” he said.

In fact, it’s going to get worse before it gets better. Case in point: Congress last week agreed to extend the temporary cuts to the payroll tax, which helps pay for Social Security. At the same time, an aging U.S. population is driving 10,000 people a day into that federal safety net.

“It doesn’t make any sense,” Bittles said.

But the issue isn’t going away.

Bittles said the powers-that-be in Washington, like a drunk who’s ready to sober up, are finally taking the first small but crucial step to deal with it:

“Admitting you have a problem.”

John P. McDermott

Not that you should. Not that you’d ever want to. But if someday you happen  to fall behind on credit card payments, Pennsylvania is among the safest places  in the country to do it.

It is one of four states — the others being North Carolina, South Carolina  and Texas — where debt collectors cannot garnish your wages if you default,  according to Clayton S. Morrow, a consumer protection attorney in  Pittsburgh.

Elsewhere, collection agencies may seek a court order requesting that your  employer siphon off 25 percent of your disposable income, after deductions for  taxes and Social Security. That is, after your employer has siphoned off any  alimony, family support, criminal restitution or student loans on which you’re  also delinquent.

But there are plenty of other means, within the federal Fair Debt Collection  Practices Act, for collection agencies to recover the money. However, some debt  collectors — intentionally or unwittingly — cross the line.

“You have what I call ‘rogue collectors’ that operate outside the law, out of  somebody’s basement and their address is a P.O. box,” Mr. Morrow said.

The Federal Trade Commission investigates debt collectors to identify and try  to correct violations of the Fair Debt Collection Practices Act; therefore, it  behooves consumers to educate themselves about the law, said Jeffrey L. Suher, a  Monroeville attorney who specializes in the debt collection act and the Fair  Credit Reporting Act.

Last spring, the FTC announced its largest settlement ever in a debt  collection case. West Asset Management Inc. agreed to pay a $2.8 million civil  penalty for, among other violations, misrepresenting itself as a law firm,  threatening to arrest or imprison debtors, debiting consumers’ bank accounts,  imposing credit card charges without authorization and revealing consumers’  debts to friends, employers or family members.

In its 2011 report to Congress, the FTC received more than 140,000 consumer  complaints regarding unfair, deceptive and abusive debt collectors, 4 percent  more than the previous year.

Not every complaint alleged illegal behavior. The commission also noted the  number of complaints might not accurately reflect perceived violations since  many consumers file complaints only with the debt collector or the creditor or  they file with another enforcement agency. According to the report, a  significant number of consumers “may not be aware that the conduct they have  experienced violates the [Fair Debt Collection Practices Act].”

With that knowledge gap in mind, it’s important to know what collection  agencies — which buy credit card debt in bulk or get a percentage on recovered  credit card debt — can and cannot do.

Debt collectors may:

• Mail you notices, usually with a 30-day warning that collection calls may  commence.

• Call you a few times per day between 8 a.m. and 9 p.m.

• Call a friend, relative or neighbor to confirm your location.

• Threaten to sue you during the first four years of your debt.

• Sue you and, if they get a judgment in their favor, freeze your bank  account.

• Continue to call you as long as you remain in debt.

Deb collectors may not:

• Harass you with repeated or continuous calls.

• Use obscene, profane or abusive language.

• Call you before 8 a.m. or after 9 p.m.

• Leave you a message regarding your debt.

• Threaten to show up at your work.

• Call your work if you’ve informed them your employer prohibits such  calls.

• Threaten to garnish wages if you work in Pennsylvania.

• Disclose your debt to your employer, coworkers, neighbors, friends or  family members.

• Call after you’ve notified them you have retained a lawyer.

• Misrepresent the amount, status or character of your debt.

• Demand a larger payment than is permitted by law; for example, by  requesting interest, fees or expenses you do not owe.

• Fail to identify themselves as a debt collection agency.

• Threaten violence or damage to your property.

• Threaten to have you arrested. Failing to pay a debt is a civil matter.

• Threaten any behavior it does not intend to pursue, such as a civil suit,  seizure of property, criminal prosecution, getting the debtor dismissed from a  job, ruin a person’s credit rating.

• Threaten to sue past the four-year limit, although no limit exists on how  long they can try to recover the money.

• Threaten to sue you if you make your first payment as a result of  collection calls made after the four-year statute of limitations expires,  effectively deceiving you, unlawfully, into restarting the four-year clock for a  lawsuit.

Consumers have a right to:

• Request a statement of the debt in writing. The collection agency must  provide it before moving forward with any further requests.

• Be informed if the debt collector has passed its four-year window to sue  you.

• Submit a “cease communication” request in writing, stating you don’t want  to receive further notice or you don’t intend to pay. The debt collector must  cease collection attemptsbut may still sue you within the four-year statute of  limitations.

• Sue the debt collector if they violate the laws stated above.

Mr. Morrow suggested that individuals who receive collection calls make note  of any statements that seem “disrespectful, undignified, unfair, or untrue” and  jot down the date, time and name of the representative.

Mr. Suher offered these tips:

• First, find out who owns your debt. If you’re dealing with a debt buyer, he  said, they often don’t have the documents they need to know how much the  consumer owes and inflate the amount.

• Do not ignore a lawsuit. If you receive a notice to appear in court, show  up.

• Once a year, request a free credit report. Debt can legally remain on a  credit report for 7 1/2 years after default. Whether you make your payment or  not, the debt must come off the credit report.

A new proposed rule would bring debt collectors and consumer reporting firms under federal supervision

A controversial government regulator set up after the 2008 financial collapse is taking aim at debt collectors and credit reporting agencies, proposing a rule that would bring the industry’s largest players under federal supervision for the first time ever.

“Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks,” said Consumer Financial Protection Bureau director Richard Cordray, in a statement on the bureau’s website. The new oversight from the CFPB would change that, applying the same supervision process to financial services providers outside the banking industry.

The impact of such a rule could be sweeping—about 30 million Americans currently have debt being pursued by collections agencies and the three largest consumer reporting agencies have information on more than 200 million Americans, according to the CFPB.

“These are [firms] involved in the financial system who have not been traditionally regulated,” says Ira Rheingold, executive director of the National Association of Consumer Advocates, adding that while the Federal Trade Commission has historically handled regulating debt collectors and credit reporting agencies, it has had limited reach.

The CFPB wants “to go after the big actors involved in industries that really affect the financial services marketplace and clearly both debt collections and credit reporting are two of those places,” he says.

The details of the new oversight are still murky, but it could allow the CFPB to go into theses business and examine their books and evaluate their practices. “They could do a compliance review, which was never really done before,” Rheingold says.

It could also mean the CFPB has the authority to set rules governing the practices of the industry. “It’s a very important announcement and something that we’ve needed for a very long time but didn’t really have because the FTC was hamstrung,” Rheingold says. “They didn’t have quite the same authority as the CFPB has.”

Under the proposed rule, only debt collectors earning more than $10 million annually would be subject to supervision. Those businesses amount to about 4 percent of companies in the industry, but account for more than 60 percent of debts collected each year.

The rule would also cover credit reporting, which is used to evaluate applications for credit cards, mortgages, auto loans and other types of credit. Agencies making more than $7 million a year would be subject to CFPB supervision, only about 7 percent of all agencies, but those companies cover about 30 consumer reporting firms and about 94 percent of proceeds earned from consumer reporting.

Bottom line, it’s an excellent development for consumers, Rheingold says.

“These are industries that need supervision,” Rheingold says. “There’s probably no other industry that gets more complaints than the debt collection industry and then credit reporting is just so central to every decision these days.”

The proposed rule is open for comment for 60 days during which the public is encouraged to weigh in on the details. The rule must be issued by July 21, according to the CFPB.

By  Meg Handley

WASHINGTON (CNNMoney) — For the first time in history, debt collectors — the guys who hound you over unpaid bills — are about to get a tough federal regulator scouring their own books.

The Consumer Financial Protection Bureau on Thursday released a new proposal to regulate the largest debt collection agencies and consumer reporting agencies, which includes credit bureaus that sell consumer credit reports.

The move could impact consumers nationwide. Some 30 million Americans have debt under collection, and the average unpaid debt was around $1,400, according to the bureau.

6 new tools to help you get out of debt

With so many consumers struggling with unemployment and debt, Cordray said that more Americans are at the mercy of debt collectors and credit reporting companies, which employers are increasingly consulting before making hires.

Cordray said that employers’ use of credit reports in hiring decisions “may not always be fair for consumers, but it reflects the reach and scope and importance of the consumer reporting field.”

The end of paid credit report monitoring?

And that’s why the bureau has decided to target those who gather and crunch consumer financial data, as well as those who chase unpaid bills. The consumer bureau will also be announcing what other kinds of nonbanking financial firms it plans to scrutinize in coming months, Cordray said.

With Obama’s recess appointment of Cordray to director of the consumer bureau, new powers kicked in for the bureau regulating the largest nonbanking financial firms, including payday lenders and for-profit student lenders.

Extreme debtors

While the bureau generally has the ability to create and enforce rules for all debt collectors and credit reporting agencies, it has special oversight powers over the largest participants, thanks to the Dodd-Frank financial reform act. The bureau can march into the offices of the largest nonbanking entities and look at their books to make sure they’re giving consumers a fair shake.

Cordray called the bureau’s supervision power “more effective” when it comes to helping consumers, as opposed to the “blunt instrument” of filing lawsuits — a recourse against firms that don’t abide by the bureau’s enforcement powers.

The new proposed rule lays out which debt collectors and credit reporting firms are subject to closer scrutiny. The consumer bureau will gather comment and finalize the rule by July 21.

For debt collectors, it’s a smaller piece of the market, since so many debt collectors are small companies.

The rule released Thursday would put about 175 debt collectors with more $10 million in receipts under the consumer bureau’s closely watched list. The bureau says that would cover roughly 4% of about 4,500 debt collection companies in the United States. However, that 4% makes up 63% of the outstanding debt these firms are after.

For credit reporting firms, the bureau will have a broader reach. They will be able to regulate and scour the books of firms with more than $7 million in receipts –some 94% of the outstanding debt covered by the firms, including Equifax, Experian and TransUnion.

By Jennifer Liberto

The latest report from the Federal Reserve shows that consumers used their credit cards quite extensively to fund their holiday shopping.

Revolving credit, which is made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December. It rose nearly $3 billion to $801.0 billion.

This follows a jump of $5.5 billion in November which was an annual rate increase of 8.4 percent.

December was the fourth straight month of increases in revolving credit.

Analysts are a bit torn on what this means. This could be a positive sign that consumers are more confident in the economy. On the other hand, it could mean that people are struggling and have to rely on using their credit card to make ends meet.

But this much is clear: consumers are going into 2012 with higher credit card debt, but the same wages. If consumers have a hard time paying down this debt, then we might see delinquencies and defaults start to increase by spring.

Bill Hardekopf

Federal tax laws requiring creditors to report forgiven credit card and other  debts as income are so confusing and riddled with problems that taxpayers are  burdened by the process, according to a national taxpayer advocate’s report.

The Taxpayer Advocate Service, a national consumer advocacy arm of the IRS,  has cited numerous problems with canceled debt, including the need for the IRS  to establish a special unit devoted to helping consumers avoid tax penalties and  overpaying taxes.

Problems with the so-called 1099-C canceled debt tax notices “are impacting  significantly more taxpayers as a result of current economic conditions,” Nina  Olson, the national taxpayer advocate, wrote in her 2010 report to Congress.

Canceled debt notices skyrocket during recession The  faltering economy has fueled a rise in credit card charge-offs — when banks and  credit unions write credit card debts off their books as uncollectable. In  addition, many consumers strapped for cash to pay their bills have negotiated  with credit card issuers to pay less than they owe in debt settlement deals. The  IRS requires that creditors that accept less than the amount owed on outstanding  debts send a 1099-C debt cancellation notice to both the IRS and the  debtor. The IRS considers canceled debt as income because the borrower is  receiving the value of the forgiven debt.

Between 2003 and 2010, 1099-C  notices skyrocketed nationwide, rising from fewer than 1 million issued in 2003  to 3.9 million in 2010. According to the taxpayer advocate’s estimates, about  half of the notices are for forgiven credit card debts.

As the number of 1099-C notices has grown, so have the problems associated  with them. The taxpayer advocate identified concerns about errors and  inaccuracies on 1099-Cs as No. 10 on the list of 21 “Most Serious Problems”  encountered by taxpayers. Each year, the advocate issues a report to Congress  with recommendations for reducing taxpayer confusion and improving fairness and  communication. Concern about confusion over how to correctly fill out the 1099-C  tax documents led Olson’s office to  release a video in 2009 to help consumers understand the reporting  rules.

Among the 1099-C problems identified by the tax advocate:

• Wrong address. The IRS may get a 1099-C for someone but the  actual debtor may never receive it because the creditor doesn’t have an accurate  mailing address. If the debtor fails to report the canceled debt on his or her  tax return, the IRS sends a notice demanding payment of the tax. The tax  advocate’s random survey of 2008 tax returns found that 43 percent of the 1099-C  notices contained addresses that were different from the address on the actual  tax return.
• Incorrect amount of canceled debt. Mix-ups in databases and  mistaken identity can lead to the wrong person getting a 1099-C or getting a  notice with the incorrect amount of canceled debt. Experts advise anyone who  receives a 1099-C to verify with the creditor that the amount is correct.
• Insolvent taxpayers don’t claim exemption. The taxpayer  advocate’s random sample of tax returns in 2008 found a significant number of  consumers likely would have qualified for an exemption to pay taxes on their  canceled debts because they were low-income. However, only a small percentage of  people actually filed for the exemption.
• Continued collection of ‘canceled’ debt.  According to  the tax code, you are not liable to pay taxes on forgiven debt until it has  actually been canceled by the lender. However, U.S. Treasury rules identify  eight different triggers that would prompt creditors to mail out 1099-Cs. Banks  must write off credit card debt if accounts are delinquent more than 180 days.  As the tax advocate points out, “Because Form 1099-C is issued independently of  whether a debt has actually been discharged, a creditor may attempt to collect a  debt even after issuing a Form 1099-C. This may place the taxpayer in the  position of being told by the creditor to pay the debt while simultaneously  being told by the IRS to pay tax on the income from cancellation of the debt.  Worse still, a creditor may threaten to issue Form 1099-C as a means of coercing  a debtor to pay, because ‘there’s no better dog to sic on a debtor than the U.S.  government.’”

In short, if the creditor hasn’t actually canceled your debt, you are not  obligated to pay taxes on the forgiven amount, according to the taxpayer  advocate. However, consumers who receive a 1099-C notice have no way of knowing  if the debt has not been canceled and that they may not have to report it as  income at that point.

Still fighting a ‘canceled’ debt in court Suzanne  Edwards, a California musician and single mother, says she has been caught in  the 1099-C maze. Her case is doubly complicated because Edwards claims she’s a  victim of mistaken identity and the debt was never hers. Nonetheless, when a  creditor issued a 1099-C in her name in 2005, she was stuck with the tax bill  for $5,181 in forgiven debt.

She says she never received the 1099-C, which may have been sent to the wrong  address, and that she found out about the forgiven debt after the IRS sent her a  letter three years later informing her they were adjusting her return. The  adjustment lowered her refund that year. Edwards is now fighting a debt  collection lawsuit on that same debt in Superior Court in California. The  creditors now want $7,000, she says.

“How can they still try to hammer me?” Edwards asks. “They’ve already written  off $5,000 of it to me. They can’t have it both ways. But they’re still trying  to hammer me.”

She adds: “I’m certain I’m not the only one who has experienced this.”

She’s right. She’s not alone, but there are no estimates on just how many  people may be impacted by 1099-C errors.

“Be sure to verify that the 1099-C is even correct,” advises Annette Nellen  of the American Institute of Certified Public Accountants. “That might not be  the right dollar amount. Maybe you had a dispute with the credit card company as  to what you really owed.” She cited a California tax board study published in  October 2011 that found that nearly half of the state tax returns reviewed by the board had  inaccurate 1099-C notices.

According to the taxpayer advocate’s office, consumers rarely get corrected  1099-C forms from their creditors. Sometimes the original creditor has gone out  of business or relocated. Nellen points out that there is little incentive for  the creditor to correct the form.: “They may say, ‘We already forgave it. What’s  our interest in doing anything more for you?’ They may get to it eventually, but  when?”

She adds: “When there is a dispute about the amount owed, [creditors] are  most likely going to issue the [1099-C] for what they thought the debt was.”

Nellen says consumers should carefully review their 1099-Cs for inaccuracies  and contact their creditors to request a corrected 1099-C notice.

In its response to the report, the IRS acknowledged the “burden placed on  taxpayers” when the 1099-C is incorrectly or inadequately reported by creditors  or third-party debt collectors. According to the IRS, it amended its rules in  2009 to narrow the scope of which creditors were required to send 1099-Cs.

The IRS asserts that “discharged indebtedness must be reported regardless of  whether the debtor is subject to tax on the discharged debt.” In addition, the  1099-C instructions state that “some canceled debts may not be included in  income. We believe this makes it clear to the creditor, debtor and the IRS that  receipt of the 1099-C does not necessarily translate into a receipt of income.”

The taxpayer advocate disagrees, citing evidence of confusion among  low-income taxpayers who may give up in frustration and pay taxes on forgiven  debt — even when they aren’t required to do so. That additional forgiven debt  income may boost a low-income family’s adjusted gross income up so much that it  disqualifies them for Earned Income Tax Credits (EITC). These are federal tax  credits that give cash to low-income working families.

For better and for worse, consumers are starting to take on more debt — much more, surprisingly.

The Federal Reserve reported last week that consumer credit outstanding surged in December at a 9.3 percent annual rate, thanks mostly to strong car sales and growing demand for student loans.

The seasonally adjusted dollar gain from November was $19.3 billion. That was almost triple what analysts were predicting, and December marked the second straight month of 9 percent-plus growth.

On the positive side, the increase reflects the pickup in consumer confidence and spending as the labor market has perked up since last summer. Banks, though still highly cautious with credit, are also showing a greater willingness to lend to households.

But the less upbeat part of the story is that consumers also are financing more of their pent-up appetites for cars and other products because their incomes haven’t been growing.

Many consumers already have cut their savings, but they’re not likely to keep doing that in this still-shaky economy. So they’ve been pulling out their plastic more to support their stepped-up spending.

Consumers’ credit card and other revolving debt fell sharply after the 2007-09 recession, but in the past few months it’s been growing again.

In December, total revolving credit rose by $2.8 billion, up 4.1 percent from November, after increasing $5.6 billion, or 8.4 percent, in the prior month, the Fed said.

Should we be worried that credit card balances are rising again?

Not yet, says Alan Levenson, chief economist at mutual fund giant T. Rowe Price in Baltimore.

He pointed out that December’s total revolving credit of $801 billion was still far less than the peak of $972 billion in August 2008.

Looking at another gauge, he said, overall consumer credit of $2.5 trillion was now 21.5 percent of after-tax income — near the low of the late 1990s.

“We’re still way off the cyclical peak,” he said.