It is generally legal for a company to issue a Form 1099-C and then subsequently try to collect the debt as there is sometimes a timing difference as to when a company is required to report cancellation of indebtedness versus when there is an actual discharge of indebtedness. As you can probably see here, this is controversial and creates a lot of confusion. Basically, the Form 1099-C is an informational filing that is required when an identifiable event occurs. However, the IRS does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection. I would suggest that you obtain advice from your CPA and/or tax attorney in determining the best way to proceed.
The information provided is not intended to be legal advice, but merely conveys general information related to legal issues commonly encountered. The information is not guaranteed to be correct, complete, or current. I make no warranty, expressed or implied, about the accuracy or reliability of the information. You should not act or rely on any information at above without seeking the advice of an attorney.