The creditor cannot take your federal tax refund, but you may have to file form 982 showing that you were insolvent at the time the debt was forgiven if you want to avoid paying taxes on the forgiven debt amount.
Creditors can't typically take your tax refund. But the situation you're describing sounds like a third-party debt collector maybe misinforming you about their "right" to collect/report an alleged debt. If this is the case you should discuss with a NJ consumer law/debt-defense attorney to discuss your options, as there could be violations of federal law which would entitle you to economic damages plus attorneys fees. Good luck.
File for BK before you get tax refund and exempt the tax refund out with your exemptions.
The previous information is solely for informational purposes only. If you have further questions, please contact an attorney in your area for more specific answers. Responding to your question in no way creates an attorney/client relationship, and none of the specific guarantees of privacy exist. If you have found this information helpful, kindly check the "helpful" box.
Creditors can generally not take a tax refund (except the IRS and federal student loan lenders). The lender is threatening to file a 1099C, which could decrease your refund due to an increased tax liability for forgiven debt.
Please note that I am not admitted to practice outside of the States of New York and New Jersey. Anything stated by me in this forum is for general informational purposes and is not intended to be taken as attempting to practice law in any juridiction in which I am not licensed. Further, the reading of these answers is merely for informational purposes only and does not create an attorney-client relationship absent the signing of a retainer agreement.