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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Cindy Kidd said:
In SC we have attorneys close escrow. They issue a 1099. Do you guys get the 1099C at closing or during negotiations with the lender?


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.

They file the 1099C because they get credit for their losses. If they went after anyone after issueing a 1099C, that is double dipping and is illegal for the banks.

Mark Karten, ABR, CSP, SFR, ePRO said:

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.

It just needs to be stated on the approval letter and the lender must issue by the end of the same year.

Cindy Kidd said:


Cindy Kidd said:
In SC we have attorneys close escrow. They issue a 1099. Do you guys get the 1099C at closing or during negotiations with the lender?


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.

Cindy,  

 

The information sent to the IRS from the Attorney is only to report the sale of the house.  It does not have to do with the amount of any potential deficiency.

 

A 1099-C will be received from the Lender probably around the first of the year, but even if it's not received, there is still a burden to report.

 


The 1099-C is sent to you and the IRS (Form 1099-C). The amount shown on the 1099-C in Box 2 is the amount you generally must include as gross income on your taxes (IRS Publication 908). You may request the Company not report the debt forgiveness as income on a 1099-C provided it is not taxable for such reasons as the debt is contested, the settlement is a non-taxable purchase price reduction, or you are insolvent. Your short sale contract should include a provision stating debt forgiveness should not be reported as income if it is not taxable and a follow-up letter should be sent stating the reasons the debt forgiveness is not income and that the letter itself serves to show that failure of the company to file the 1099-C ‘is due to reasonable cause and not to willful neglect’ (26 U.S.C. Section 6651).”

 

http://nogglelaw.com/2010/03/does-a-1099-c-waive-the-lienholders-ri...

Kevin is right, for the reasons he has stated. But a word of warning about those releases.  Sometimes they are not in clear, unambiguous language - read the fine print.  A couple of years ago I received a "release" from a lender. But then in microscopic small print at the bottom of the page it stated that the debt was not released and they reserved the right to pursue the borrower for a deficiency judgement.

 

At this stage we considered 2 choices: One, challenge the ambiguity and have lender clarify.  If we did so we ran the risk of having lender negate the waiver.  After discussion with my client and an attorney we decided on option 2: to leave the document as issued and if my client were ever sued he could then challenge it on several grounds, amongst them: (1) the "big type" waiver displaying the real intention, (2) the "small type" boilerplate which at best is misleading, left in by error, at worst with fraudulent intent, (3) ambiguity in contract is interpreted against the writer (the lender).

 

Oh, my.  I think we had this discussion, on a Jeff Payne post.

My business practice is that the deficiency is waived if and only if the demand letter states this explicitly.

EG: "waive future rights to pursue", "not seek a deficiency judgment", "debt is fully settled", "no further obligation"

If the demand says so, the debt is gone.   If the demand does not say so, the debt may not be gone. Hence, if the demand is silent, the debt is not gone.  Pretty simple to me.

To me, the handling of the 1099 is irrevelant.  Has no bearing on the right to collect.

Now, having said that, I rather suspect that Fannie, Freddie, Wells, BofA, etc will not collect on the debt after issue the 1099C.  But that is practice, not law, I think.

But, gee guys, do you really this couldn't happen after the MI companies are liquidated and the assets are purchased by hedge funds in Texas.  I think I shall not wager my E&O coverage on that one.

It is so, if and only if the demand says so.

I got a 1099A for my investment property. Some day I suspect the crap will hit the fan big time. Until then, I just keep on trucking as best I can. If the frickin bank would of been willing to work with me.....
I took this information to my tax accountant in Oregon, and her response was with a lender filing a 1099c, there could very well be  additional tax liability to the buyer owed IRS come tax time on the amount forgiven by the bank as noted on the 1099c. It would depend on if the seller is "solvent" or "insolvent". I am advising all my clients to seek advice on how this applies to them from their tax accountant, as well as their attorney.

Well t's all as clear as mud now!! It sounds like we need to be certain that our sellers are seeking competent legal and tax advice. Or we can just say "Harry said so" :)

I'm doing a Short Sale and the lender is H&R block. They want a $50K note at 5% from the seller. It's not going to happen, she clearly doesn't have the money. We offered $10K and they said no and responded, "if she doesn't agree to the $50K we will go after her once she goes into foreclosure." However this is California and the won't happen either. It's very frustrating!!

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