In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-2134
AMY DUNBAR,
Plaintiff-Appellant,
v.
KOHN LAW FIRM, S.C, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 17-CV-88 — William E. Duffin, Magistrate Judge.
____________________
No. 17-2165
TAMMY SMITH,
Plaintiff-Appellant,
v.
WELTMAN, WEINBERG & REIS COMPANY, LPA,
Defendant-Appellee.
____________________
Appeal from the United States District Court
for the Southern District of Illinois.
No. 3:16-CV-1333-NJR-SCW — Nancy J. Rosenstengel, Judge.
2 Nos. 17-2134 & 17-2165
____________________
ARGUED JANUARY 18, 2018 — DECIDED JULY 19, 2018
____________________
Before SYKES and HAMILTON, Circuit Judges, and LEE,
District Judge. 1
SYKES, Circuit Judge. Amy Dunbar and Tammy Smith re-
ceived collection letters offering to settle their debts at a
significant discount. Both letters included the warning: “This
settlement may have tax consequences.” In separate suits
Dunbar and Smith claimed that this statement is misleading
in violation of the Fair Debt Collection Practices Act
(“FDCPA”), 15 U.S.C. § 1692e, because they were insolvent
when they received the letters and therefore would not have
incurred a tax liability for any discharged debts.
The courts below rejected that argument and dismissed
the suits on the pleadings. We consolidated the appeals and
now affirm. The challenged statement is not false or mislead-
ing because “may” does not mean “will” and insolvent
debtors might become solvent before settling their debt,
triggering the possibility of tax consequences.
I. Background
In January 2016 the Kohn Law Firm, S.C., a collection law
firm, sent Amy Dunbar a letter seeking to collect a debt
originally owed to a bank. The letter stated that the full
balance due was $4,049.08 and offered to settle the debt for
$2,631.90, but warned: “NOTICE: This settlement may have
1 Of the Northern District of Illinois, sitting by designation.
Nos. 17-2134 & 17-2165 3
tax consequences.” Dunbar was insolvent when she received
the letter and filed for bankruptcy six months later.
That same month Weltman, Weinberg & Reis, also a col-
lection law firm, sent Tammy Smith a collection letter seek-
ing to collect a consumer credit-card debt. The letter stated
that the balance due was $4,319.69 and invited Smith to
contact the law firm to discuss satisfying her debt obligation
for a reduced amount. Like Dunbar’s letter, this letter
warned: “This settlement may have tax consequences.”
Smith too was insolvent when she received the letter and
filed for bankruptcy two months later.
Dunbar and Smith filed separate actions under § 1692e
alleging that the collection letters were misleading because
they were insolvent and therefore would not have had to
pay taxes on any discharged debt. A magistrate judge and
district judge, respectively, dismissed the cases for failure to
state a claim. See FED. R. CIV. P. 12(b)(6). Both judges con-
cluded that alerting debtors that a settlement “may” have tax
consequences is neither false nor misleading.
II. Discussion
The FDCPA makes it unlawful for a debt collector to use
“any false, deceptive, or misleading representation or means
in connection with the collection of [a] debt.” § 1692e. An
objective “unsophisticated consumer” standard applies to
§ 1692e claims: We ask “whether a person of modest educa-
tion and limited commercial savvy would be likely to be
deceived” by the debt collector’s representation. Evory v.
RJM Acquisitions Funding L.L.C., 505 F.3d 769, 774 (7th Cir.
2007). The objective test disregards “bizarre” or “idiosyn-
cratic” interpretations of collection letters. Gruber v. Creditors’
4 Nos. 17-2134 & 17-2165
Prot. Serv., Inc., 742 F.3d 271, 274 (7th Cir. 2014); Durkin v.
Equifax Check Servs., Inc., 406 F.3d 410, 414 (7th Cir. 2005). A
collection letter can be “literally true” and still be mislead-
ing, Gonzales v. Arrow Fin. Servs., LLC, 660 F.3d 1055, 1062
(9th Cir. 2011)—for example, if it “leav[es] the door open”
for a “false impression,” Fields v. Wilber Law Firm, P.C.,
383 F.3d 562, 566 (7th Cir. 2004).
Because this is a fact-laden inquiry, dismissal on the
pleadings is proper only in “cases involving statements that
plainly, on their face, are not misleading or deceptive.”
Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 366 (7th
Cir. 2018) (quotation marks omitted). Our review is de novo.
Gruber, 742 F.3d at 274.
To begin, the statement at issue here—“this settlement
may have tax consequences”—is literally true. The discharge
of a debt is generally considered taxable income. 26 U.S.C.
§ 61(a)(11). There are some exceptions. Relevant here, the
discharge of a debt is not taxable if it occurs while the tax-
payer is insolvent, meaning that his liabilities exceed the
value of his assets. Id. § 108(a)(1)(B), (d)(3). We accept, as we
must, that Dunbar and Smith were insolvent when they
received the collection letters. No matter. A generalized
statement that a debt settlement “may” have tax conse-
quences is true on its face.
A literally true statement may be misleading if it gives a
false impression. The plaintiffs argue that the warning has
this effect for two reasons. First, they contend that a debtor
might read the tax-consequences statement to mean that if
he does not pay the full balance owed, the debt collector or
creditor will report him to the IRS. But the challenged state-
ment says nothing whatsoever about IRS reporting, so we
Nos. 17-2134 & 17-2165 5
can safely disregard that proposed reading as “bizarre” or
“idiosyncratic.” 2 Gruber, 742 F.3d at 274.
Second, the plaintiffs insist that a debtor might read the
reference to “tax consequences” to mean that he could incur
a tax liability if he settles his debt for less than the full
amount due, and that’s contextually misleading because
most recipients of debt-collection letters are insolvent and
therefore would incur no tax liability from a discharged
debt. We’re not persuaded. An unsophisticated consumer
would not understand the word “may” to mean “will.” And
an insolvent debtor can emerge from insolvency at any time.
Our decision in Taylor v. Cavalry Investment, L.L.C.,
365 F.3d 572 (7th Cir. 2004), is instructive on this point. The
collection letter there stated: “[I]f applicable, your account
may have or will accrue interest at a rate specified in your
contractual agreement with the original creditor.” Id. at 574.
For one of the plaintiffs, the account continued to accrue
interest, but for the other two, the accounts were closed and
the creditors stopped adding interest. Id. The plaintiffs
argued that the statement was false in violation of the
FDCPA because two of the creditors were no longer adding
interest. Id. at 575. We called that argument “downright
frivolous” because “[t]he letter didn’t say they would [add
interest], only that they might.” Id. Similarly here, it is not
misleading to say that a debtor who settles a debt may incur
2 In some situations an entity that discharges a debt must file a 1099-C
form with the IRS. 26 U.S.C. § 6050P(a). No obligation to report exists if
the principal debt forgiven falls below $600. 26 C.F.R. § 1.6050P-1(a)(1),
(d)(2)–(3); 26 U.S.C. § 6050P(b). The reporting obligation has no bearing
on this case because the law-firm collection letters did not mention IRS
reporting.
6 Nos. 17-2134 & 17-2165
a tax liability. The use of the word “may” signals only that
tax consequences are possible in the case of some debtors,
not that tax consequences are possible or likely (much less
certain) in this particular debtor’s circumstances.
Further, contrary to the plaintiffs’ argument, the tax-
consequences warning does not give the false impression
that debtors should pay their entire debt to avoid a tax
liability. The letters are invitations to settle the debt and are
clearly meant to encourage the debtor to take advantage of
the discount offered. A rational debtor knows that income
taxes are calculated as a percentage of income, and he would
likewise understand that even if the discount counts as
taxable income, the benefit would still outweigh the cost.
That makes it all the more implausible that the tax-
consequences warning would dupe a debtor into paying the
full debt amount.
The plaintiffs rely heavily on our decision in Lox v. CDA,
Ltd., 689 F.3d 818 (7th Cir. 2012), but that case is easily
distinguished. The debt-collection letter there stated: “Our
client may take legal steps against you[,] and if the courts
award [judgment], the court could allow court costs and
attorney[’s] fees.” 689 F.3d at 820–21 (emphasis added). In
reality, however, an award of attorney’s fees was impossible
because the contract between the debtor and creditor did not
provide for them. Id. at 823–24. We found this statement
misleading because it implied that the debt collector could
do something—file a lawsuit to recover the debt plus attor-
ney’s fees—that it was not authorized to do. Id. at 824–25. In
contrast, the tax-consequences statement at issue here is not
misleading because it does not imply that the debt collector
may or will do something it has no authority to do.
Nos. 17-2134 & 17-2165 7
The plaintiffs also rely on Gonzales v. Arrow Financial Ser-
vices, 660 F.3d 1055 (9th Cir. 2011), but that case too is distin-
guishable. There the debt collector was collecting on a
portfolio of debts that were more than seven years old and
therefore obsolete, which meant none of them could be
reported to a credit bureau. Id. at 1059. The collection letter
stated: “Upon receipt of the settlement amount and clear-
ance of funds, and if we are reporting the account, the appropri-
ate credit bureaus will be notified that this account has been
settled.” Id. The debt collector’s conditional language—“if we
are reporting the account”—made the statement literally
true. Id. at 1062. But the statement implied that the debt
collector could report the obsolete debts to a credit bureau;
the Ninth Circuit found that implication misleading because
there were no circumstances under which it could do so. Id.
at 1063. Again our case is meaningfully different. The tax-
consequences warning does not imply that the debt collector
can or will take an action it has no authority to take.
Another distinguishing feature in both Lox and Gonzales
is that the conditions were static. There was no chance that
the contract between the debtor and creditor in Lox would be
rewritten to provide for attorney’s fees. Nor was there any
possibility that the old, obsolete debts in Gonzales would
suddenly become reportable to a credit bureau. Solvency, on
the other hand, is fluid. An insolvent debtor may become
solvent before settling his debt. So it is not misleading to say
that a debt settlement “may” result in a tax liability—not
only because solvent recipients may face tax consequences
but also because insolvent recipients like Dunbar and Smith
could become solvent before settling their debts.
8 Nos. 17-2134 & 17-2165
Yet another reason Lox and Gonzales do not apply here is
that a debt collector has no reason or way to know whether
an individual debtor is solvent or insolvent at a given time.
In contrast, the debt collector in Lox knew (or could easily
determine) whether the contract between the creditor and
debtor allowed for attorney’s fees, and the debt collector in
Gonzales was well aware that the debts it was collecting were
obsolete and therefore not reportable to credit bureaus.
Here, in contrast, a consumer would not expect a debt
collector to know his financial status and therefore would
not expect a debt-collection letter to be specially tailored to
his particular financial circumstances, whether solvent or
insolvent.
The plaintiffs also invoke a handful of district-court deci-
sions, but all are inapplicable or unpersuasive. In Drennan v.
Van Ru Credit Corp., 950 F. Supp. 858, 860 (N.D. Ill. 1996), the
challenged collection letter stated: “The legal review process
may … result in a recommendation to your creditor to file a
lawsuit against you.” Drennan involved a particular subsec-
tion of § 1692e that makes it unlawful for debt collectors to
“threat[en] to take any action … that is not intended to be
taken.” Id. (citing 15 U.S.C. § 1692e(5)). The district court
denied a motion to dismiss because the complaint alleged
that the debt collector had no intention of recommending
that the creditor sue the debtor. Id. Any comparison to
Drennan is entirely inapt; the defendants here are not ac-
cused of making a false threat.3
3 The plaintiffs’ reliance on Federal Trade Commission commentary is
misplaced for the same reason. The commentary in question discusses
when a debt collector is permitted to threaten possible action by it or a
third party. Statements of General Policy or Interpretation, Staff Com-
Nos. 17-2134 & 17-2165 9
Next, the plaintiffs point to district-court decisions find-
ing collection letters misleading because they generalized
that the debt collector was required to report settlements to
the IRS without identifying the circumstances under which
no such report was necessary. See Carlvin v. Ditech Fin. LLC,
237 F. Supp. 3d 753, 758 (N.D. Ill. 2017) (“Not only did
[d]efendant’s statement fail to describe the specific excep-
tions that might apply, it failed to acknowledge the existence
of any exceptions by asserting that [d]efendant was required
to report any debt forgiveness.”) (internal quotation marks
omitted); Good v. Nationwide Credit, Inc., 55 F. Supp. 3d 742,
746–47 (E.D. Pa. 2014) (holding that the statement that the
creditor is “required to file a form [1099-C] with the Internal
Revenue Service for any cancelled debt of $600 or more” is
not entirely accurate because it fails to notify the debtor of
exceptions to the reporting requirement). Neither case helps
our plaintiffs. Each involved a debt-collection letter that
mischaracterized a mere possibility as a certainty. That’s not
so here. The law-firm collection letters merely signaled as a
general matter that tax consequences are a possibility.
There’s nothing misleading about that.
Finally, the plaintiffs hang their hat on Sledge v. Sands,
182 F.R.D. 255 (N.D. Ill. 1998). The collection letter there
stated: “[U]nder certain circumstances, cancellation or dis-
charge of [a] debt may be considered income” by the IRS and
state taxing authorities. Id. at 257 (emphases added). The
district court held that if a majority of debtors receiving this
mentary on the FDCPA, 53 Fed. Reg. 50097, 50106 (Dec. 13, 1988). The
statement in question here simply warns that a settlement “may” have
tax consequences; it does not say or imply that the debt collector or a
third party may take an action against the debtor.
10 Nos. 17-2134 & 17-2165
letter would not realize income for the discharged debt, then
the statement created a misleading impression in violation of
the FDCPA. Id. at 260. This reasoning rests on the faulty
assumption that a debtor receiving this letter would ignore
the phrase “under certain circumstances” and misconstrue
“may” to mean “will.” We do not find Sledge persuasive. 4
In short, the § 1692e claims were properly dismissed on
the pleadings. The tax-consequences warning is literally true
and not misleading under the objective “unsophisticated
consumer” test.
AFFIRMED.
4 The plaintiffs also analogize to several FTC Act cases from the 1950s
and 1960s challenging deceptive advertisements promoting cures for
baldness and fatigue. See, e.g., Erickson v. FTC, 272 F.2d 318, 319–21 (7th
Cir. 1959) (involving an ad falsely claiming “without qualification” that a
product would cure baldness); J.B. Williams Co. v. FTC, 381 F.2d 884, 890–
91 (6th Cir. 1967) (involving an ad falsely claiming that a treatment
would cure fatigue in most cases); Keele Hair & Scalp Specialists, Inc. v.
FTC, 275 F.2d 18, 19–20 (5th Cir. 1960) (involving a similar ad falsely
claiming that a product would cure baldness in 95% of cases). These
cases are irrelevant here. The collection letters in this case did not falsely
claim that a debt settlement would result in tax liability in most or many
cases.