I went to a Short Sales & Tax Implications seminar presented by a real estate attorney and was advised that in the state of FL waiving the deficiency judgment does not preclude a bank from attempting to
recover balance owed. Unless the approval specifies no deficiency judgment on the mortgage and note the investors can still collect on the note. While the deficiency may have been waived on the mortgage the instrument is just collateral for the note; therefore, the promise to pay as agreed to on the note
itself can still be called due. In essence, the borrower could potentially receive a 1099 and still have a deficiency judgment. Has anyone else heard of this?

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Hi Amanda. I have not heard this and don't believe it to be true. The mortgage is the security instrument and the note is the promise to pay. My understanding is that there is never a deficiency on the mortgage. The deficiency is on the note. And a deficiency always exist. The question is does the lender handle the deficiency by writing it off, marking it settled, going after a judgment or just selling the deficiency to a collection agency. It's the judgment that's the biggest problem. A written waiver of deficiency is waiving the right to go after the borrower on their debt (the note).

If the borrower receives a 1099 C then the debt is cancelled. Can someone cancel a debt (the note) and still come after you later? I don't think so. But of course I am not an attorney.

   What he is saying here is common knowledge. If an approval letter has no line about Full Waiver, then the lender has secured it's rights to seek a judgement within 5 years. 

 The investor is bound by what the servicer does and agrees to. If your approval letter does not include the verbage :Full Waiver" then go back. Tell them you can not have your seller sign and agree to such an open ended approval.  And then you want the 1099C, with this the lender/investor can not collect anything else. That would be double dipping and it is illegal for the lender. If you get the letter and it says 1099A or just 1099, you need to tell them it needs to say 1099C.

I'm with Bryant - I'm not buying this either. Most short sale letters I see that provide debt forgiveness state that they "waive their rights to pursue" for either the balance due or a deficiency judgment. While I suppose an investor could try to collect after issuing a 1099C and a forgiveness letter, I can't believe they could possibly prevail.

Great discussion.  I'll just chime in from what we've learned from our real estate attorneys here in Nevada.  The 1099C, according to the banks and some court cases (not relating to short sales), is issued because the IRS requires it.  The banks say "unless we specifically waive our right to pursue, in writing" the 1099C does not imply that we do.  We file a 1099C because that is IRS law.

 

Because we don't have any evidence yet of a pursuit (with or without a 1099C issued), it is argued that the lender would have to issue an amended 1099C if they were to collect on any of the outstanding debt.  So, we tread lightly, give our clients all the possible scenarios and take it one step at a time.

 

Most of us think we're going to get sued years down the line for giving the wrong information and guidance, so we don't represent ourselves as experts or that what we say is the definitive truth.  We leave that to the attorneys.

In most cases I have the sellers talk to a good bankruptcy attorney. Although I'm not qualified to personally recommend this tactic, if their hardship is financial and they've already missed payments on both the first and the second mortgage, they're probably best served by filing chapter 7 if they can qualify. They would preferably do this after the short sale of their home but they could do it before listing the home as well.

 

This will get rid of the second mortgage plus anything else they owe. Since they can get qualify for a mortgage (under the right circumstances) 3 years after the sheriff's sale, they can also get a new mortgage 3 years after coming out of chapter 7. Plus with chapter 7 releasing the debt, there is no 1099-C issued and therefore no phantom tax.

 

This works well in MN since first mortgages are deficiency free when public foreclosure is used (which is 99% of the time) but second mortgages can be very difficult to deal with.

you get a 1099 or the bank holds on the the balance and can pursue you later when you win the lottery. It's one or the other, there cannot be both.

 

It;s like a credit card bill ...do you see the creditors sending you a 1099 when you haven't paid in years? No, because they are holding onto there rights to seek the money.

 

Banks who send 1099's and "attempt" to collect the debt are breaking the law. They have either wiped the debt or they haven't. Its black and white really... there is no gray.

 

 

Bryant,  The answer is maybe.... - http://www.assetprotectionfl.com/2010/04/can-a-mortgage-lender-seek...

Bryant Tutas said:

Hi Amanda. I have not heard this and don't believe it to be true. The mortgage is the security instrument and the note is the promise to pay. My understanding is that there is never a deficiency on the mortgage. The deficiency is on the note. And a deficiency always exist. The question is does the lender handle the deficiency by writing it off, marking it settled, going after a judgment or just selling the deficiency to a collection agency. It's the judgment that's the biggest problem. A written waiver of deficiency is waiving the right to go after the borrower on their debt (the note).

If the borrower receives a 1099 C then the debt is cancelled. Can someone cancel a debt (the note) and still come after you later? I don't think so. But of course I am not an attorney.

Can A Mortgage Lender Seek Deficiency Judgment After Issuing A Form...

The answer is yes; the lender can pursue a deficiency claim even after issuing the borrower and filing a 1099. A form 1099 is not a legal release of the borrower’s liability. After issuing a form 1099 the mortgage lender can still legally sue for a deficiency claim, or the lender could sell the claim to a third-party. The lender takes a tax loss when it issues a 1099 to the borrower. If the lender subsequently sues the borrower or sells the claim the lender would recognize taxable income in the amount of money it collects from the borrower or the amount it receives from a third party when it sells the deficiency claim.

http://www.assetprotectionfl.com/2010/04/can-a-mortgage-lender-seek...

Thanks, Kevin.  Good stuff!!

Kevin M. Lancaster - Willson said:

Can A Mortgage Lender Seek Deficiency Judgment After Issuing A Form...

The answer is yes; the lender can pursue a deficiency claim even after issuing the borrower and filing a 1099. A form 1099 is not a legal release of the borrower’s liability. After issuing a form 1099 the mortgage lender can still legally sue for a deficiency claim, or the lender could sell the claim to a third-party. The lender takes a tax loss when it issues a 1099 to the borrower. If the lender subsequently sues the borrower or sells the claim the lender would recognize taxable income in the amount of money it collects from the borrower or the amount it receives from a third party when it sells the deficiency claim.

http://www.assetprotectionfl.com/2010/04/can-a-mortgage-lender-seek...

@Mark - You're welcome. Looks like this is in line what you were taught.

1099 SHORT SALE REPORTING - IT'S THE LAW! - OR IS IT???

http://activerain.com/blogsview/444370/1099-reporting-it-s-the-law-...

 

 



Paul Antonelli said:

   What he is saying here is common knowledge. If an approval letter has no line about Full Waiver, then the lender has secured it's rights to seek a judgement within 5 years. 

 The investor is bound by what the servicer does and agrees to. If your approval letter does not include the verbage :Full Waiver" then go back. Tell them you can not have your seller sign and agree to such an open ended approval.  And then you want the 1099C, with this the lender/investor can not collect anything else. That would be double dipping and it is illegal for the lender. If you get the letter and it says 1099A or just 1099, you need to tell them it needs to say 1099C.

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