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Deficiency releaser/1099

Hailey, ID

July 03, 2010

I had a short sale investor tell me that they encourage lenders to issue a 1099 because when they do the lender can't also sue for a deficiency judgement..they can't do both. Apparently the SS investor uses this approach rather than ask for a release in writing. I don't buy it, if I did business with them I would insist that the lender put this in writing. Have any of you heard of this?

Licensed Real Estate Agent

Albuquerque, NM

July 03, 2010

Nathan-

It's short sale investors like this that want to make a profit off of the distressed homeowner's situation and will tell the homeowner whatever they want to hear in order to close the deal. Just because a lender issues a 1099 does not mean they waive their right to pursue a deficiency. It means the homeowner will have to pay income tax on that balance AND the deficiency will more than likely be sold to a debt buyer and they will pursue collection of that balance. Yes, at least here in New Mexico, the homeowner can be sued in order to collect that deficiency even if a 1099 was issued.

Melissa Threet
Associate Broker/Realtor
Certified Negotiation Expert, e-Pro
Keller Williams Realty
Albuquerque, NM
cell/direct: (505) 463-8814
office: (505) 271-8200
fax: (505) 212-0336
email: MelissaSellsABQ@aol.com
web: www.MelissaSellsABQ.com

Licensed Real Estate Broker

Pleasant Hill, CA

July 03, 2010

Nathan, I spoke with an attorney and this is what I was told. Anyone contemplating this possibility should also talk to an attorney. I'm not an attorney, and any seller of real estate in a short sale whether to an investor or private party should seek counsel of an attorney AND a CPA.

EVERY SINGLE LENDER will issue a 1099. EVERY single one. It is up to the individual tax payer to either apply for a waiver of that tax through the mortgage debt forgiveness act, or pay the tax. (YOU have to talk to a CPA, realtors aren't CPAs)

1099 and recourse and in other words, taxes and recourse are two different and distinct things.

If they issue a 1099, they can still pursue the balance. Per the attorney I heard from (in a client consult I sat in) , if they are successful in obtaining some balance back, they would have to just amend the 1099.

So, it is "old school" (like 3 year ago) type thinking that if a 1099 was issued you're safe from deficiency. Not true, and two separate things.

Licensed Real Estate Broker

Carlsbad, CA

July 03, 2010

I was told that in California (a non-recourse state for o/o purchase loans) lenders have 4 years (as in all written contracts) to collect on a deficiency when they are entitled to. Can anybody confirm this?

Licensed Real Estate Broker

Pleasant Hill, CA

July 03, 2010

Daniela, I have heard the same, however I have heard there are exceptions and the time frame may run longer in cases of suspected fraud (i.e. if a creditor wanted to claim the borrower falsified or provided erroneous information on a loan app for instance)

Licensed Real Estate Broker

Carlsbad, CA

July 03, 2010

Thanks Catherine.

Real Estate

Enfield, CT

July 04, 2010

This 1099 vs deficiency discussion seems to be all over the map and many of you have gotten conflicting information.

From my years of experience in this arena, numerous training and education and countless discussions with many attorneys, here is the skinny.

A 1099C is issued IF and When the lender decides to forgive the debt. Until then the debt is not forgiven and is a collectable deficiency that can be pursued, depending on your states recourse laws. Once the debt is forgiven and the 1099C is issued they can no longer pursue the debt, because they just forgave it, in wiriting. This is now an issue of IRS regulations as to whether the seller owes taxes on the forgiven debt.

If the lender does not forgive the debt and does not issue a 1099C they can pursue collection on the deficiency for at least as long as your states contract law allows bad debt collection activities. Most states have a specific number of years in which the lender has to sue you for a judgment or losses the ability to do so. This time frame would start in the case of a short sale at the closing date. If in your state the lender has 4 years to take you to court and in that 4 years has not, or has not been able to, collect the debt, if they did not sue you before that deadline they would lose their ability to do so. Without that judgement they can do nothing more then call you and report your debt as bad on your credit. With the judgment they can attach bank accounts, garnish wages and lien property.

So to summarize;

The lender cannot pursue the deficiency AND 1099 the homeowner at the same time. UNLESS they are only fogiving part of the debt, in which case the 1099 would be for less then the loss and the lender would only be able to pursue the remaining balance left after that forgiven portion is deducted.

In most cases it is one or the other. Either you get a 1099 because they forgave the debt and you are now free from the obligation, OR they pursue the collection of the debt and you do not get a 1099.

We can get into other scenarios such as prom notes combined with forgiven debt but that will complicate this even further.

Simply put, if you don't get an approval that says Settled, or Satisfied, or Discharged, or Released from Liability or some other way to say the same thing, you do not have an approval in writing that says they debt is being forgiven. If the approval says they will Release the Lein that only means the house can be sold with clear title, not that the sellers liability for the loss is being forgiven.

I hope this clears this discussion up at least a little.

Licensed Real Estate Agent

Louisburg, KS

July 04, 2010

The lender cannot pursue the deficiency AND 1099 the homeowner at the same time. UNLESS they are only forgiving part of the debt, in which case the 1099 would be for less then the loss and the lender would only be able to pursue the remaining balance left after that forgiven portion is deducted.

This has always been my understanding. It is the only logical explanation. Unless the deficiency is forgiven there is no basis or reason for issuing a 1099. If a 1099 is issued it means the deficiency has been forgiven.

John Cleek, Ph.D., Author
Seven Steps to Home Ownership

Licensed Real Estate Agent

Brainerd, MN

July 04, 2010

Thank you both for the clarification in this issue- it has been all over the boards. I am going with the 1099 as the absolute indicator of forgiven debt.

Short Sales are still evolving and we need to keep up or get left behind!

Hailey, ID

July 04, 2010

Thank you. I agree, they are separate, no question about consulting attorney and CPA. These guys can really leave sellers at risk.

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