What are the thoughts of the members on this site in regards to 1099c and deficiency?

My CPA seems to believe that if the lender issues a 1099c, they can not pursue a deficiency, at least in Florida.

Anyone have an real world examples?

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I didn't know there was a debate.  If there is no deficiency and the lender "forgives" the debt it's considered "cancelation of debt" (CODI cancelation of debt income) in which there is a 1099 generated.  The canceled debt is considered INCOME for tax purposes, so it's taxable, however there are provisions under the Mortgage Debt Forgiveness Act which allow for forgiveness of those taxes. 

 

If the lender reserves their right to pursue a deficiency then they cannot issue a 1099C because they didn't forgive the debt.  It's either or, but not both.

Jeff - That makes "sense" to me.  If the debt is not "forgiven" or "cancelled", then why would someone pay taxes on it? 

To me, the issue here is: If the debtor receives a 1099C, can they be pursued for the debt?

I have never found the statements "They cannot" compelling.

I follow the practice:  The deficiency is waived if and only if the payoff letter clearly states this.

If not, then I assume that there may be circumstances in which the debt could be collected.

The "right to collect" is a contractual right, subject to state and federal laws.

Issuing a 1099C is an IRS requirement.  What is the basic for the connection?

Is there really a statutory basis or circuit court case that asserts that the issuing of a 1099C by one party, extinguishes all rights to collect, by all parties, in perpetuity?

I think I will not risk my professional liability policy without a clear statement in the payoff letter.

Good responese, I too am looking for something real, like a circuit court case. 

Jeff,

I think that if there were such cases, we would know.

So, the fact that we don't is, to me, a reason to be cautious on this.

I've "Google" (my definition of research these days).

Part of the issue, I think, is that deficiencies have not generally been pursued, in the past.  But, I think that has little bearing on what happens in the future, from the equity firms that buy bankrupt mortgage insurance companies or purchasers of bad-paper from private label securitizations.

Why do we think this will be different from the purchases of credit card charge-offs?

Michael,

 

Very true and even the other attorneys I've spoken to about it do not know what the banks are going to do with this.  All they are giving is their best guess.  I just heard a report that BofA wouldn't issue a 1099-c on a purchase money 2nd in CA that went to foreclosure. So I'm sure they and other banks have their plans unfortunately. 

 

People do rely on 1099-c's but you are correct only the future will provude the answer as a practical matter.  It would seem ridiculous to me to give a tax consequence to someone and they still have to  worry about the debt.  But hey, right now we live in a ridiculous world.

 

Tni

Under the Act, a 1099 issued for 2007 to 2012 in connection with a primary residential mortgage deficiency may bear no tax consequences under the follow conditions: IRS.gov
Note: Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 through 2012.

I was the seller on a short sale that closed just this last Friday.  I had asked B of A for a 'letter of forgiveness' regarding the deficiency.  They told me they did not issue such letters but that HUD would not pursue the deficiency amount unless they felt everything was not on the 'up and up'.  I was under the impression I would receive a 1099 C regardless but at closing signed a form asking a set of about 6 questions . . . . . Is this your primary residence? Did you rent the property out?  etc.  Our answers put us in the category that this will not be reported to the IRS and that a 1099 C will not be issued.  This was FHA financed and we had PMI insurance.  Hope this answers some of your questions.  We are in Michigan.  

 

If the short sale is HUD under the FHA Preforeclosure Sale Program, then the debt is waived, assuming no fraud, as this is stated in HUD policy guide ML 2008-43.  Also, personally, I am just less concerned about Fannie, Freddie, or HUD.

I think that the future risk is with mortgage insurers, trusts, distressed asset purchasers, and private equity firms.  Not so much OCC regulated banks.  Besides, Banks don't own much of the debt, maybe $3B out of $11B?

In general, I think "reserve the right" has little meaning, because the note holder has the right to pursue (subject to state laws).  I think this is more of a disclosure, for your information.

If the payoff letter is silent on the deficiency, then I assume that the debt could be collected in the future.

To me, this seems prudent.

 

 

Gladys, what I am asking is... when your seller gets the 1099, does this also wipe out deficiency judgements?  Seems to be people on both sides on this one and nothing from the courts to help us

Gladys Gort said:

Under the Act, a 1099 issued for 2007 to 2012 in connection with a primary residential mortgage deficiency may bear no tax consequences under the follow conditions: IRS.gov
Note: Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 through 2012.

Good morning,

We did a short sale recently with Bank of America.  The seller had a first and a second with Bank of America and it was investment property.  The seller received a 1099c in January for both mortgages.  Then in February the seller received a letter that said as you are aware we sent you a 1099c for the loans mentioned above.  This letter is to inform you that since we filed 1099C for both loans we can no longer pursue a deficiency judgment on either loan and consider this matter to be closed.  I have always thought this was the case as you can't claim a loss on your taxes and then try and collect at the same time.  This letter proves my point.

What gets me is that when dealing with Bank of America they will try to get the seller to give a cash contribution in order to waive deficiency when in reality the seller will receive this once Bank of America writes of the mortgage.  We do quite a few with Bank of America as Countrywide was a dominant lender here in Florida, who was later purchased by Bank of America.  Thanks, Laura

 

 

 

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