Times are tough all over, and desperate times call for desperate measures. Some folks get second jobs. Some just cut back on luxuries, like food and health care and sleep. Some folks--the ones who still have houses, take in boarders.
And some get the IRS to pay them via tax write offs. Read about it here http://www.budhibbs.com/
The latest scam by zombie debt collectors is using the IRS via 1099 Cs to squeeze blood outa stone...
Collection agencies like Portfolio Recovery Associates buy up old debts --some decades old--for pennies on the dollar. Most of these debts are past the statute of limitations and are therefore noncollectable. The CAs then send out 1099 C to the consumer, listing the noncollectable debt as a "cancelled debt," even though the CA itself never loaned any money. In doing this, the CA attempts to get a tax write off from the IRS for money it didn't loan, for a debt that it can't verify, and can't collect on because it is time barred.
It may or may not be legal and it may or may not be ethical, but the crowd that makes its living moving money around does get creative with its machinations when times get tough. And like the Wall Street banksters, when the creative accounting doesn't work, they turn to the government for a bailout.