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First the usual caution; consult an attorney for tax advisor...
Here is my opinion: you got what you want: liability for deficiency is waived. You or your client is not liable to pay the bank the money they lost.
The 1099 is a matter in tax code called Debt Forgiveness.You will want to read this: http://www.irs.gov/newsroom/article/0,,id=174034,00.html. The issues are too long to type here.
This is just the ding to the credit report: BAC home loans will report debt as "settled as less than owed".
Now, celebrate! |
Read this - http://nogglelaw.com/2010/03/does-a-1099-c-waive-the-lienholders-ri...
Attorney Robert Noggle has researched this question and found that the Indiana Court of Appeals in Leonard v. Old National Bank Corp. Nov 21, 2005, held that “bank’s filing of Form 1099-C in response to borrower’s bankruptcy proceeding did not operate to cancel debt.” The Court went on to say that the filing of Form 1099-C was “an informational return and was filed after an identifiable event, and bank did not intend to cancel debt by filing Form 1099-C, but rather was simply trying to follow IRS instructions, 26 U.S.C.A. § 6050P.”.
Another case Attorney Robert Noggle found was in the U.S. Bankruptcy Court W.D. Pennsylvania. In re Stephen M. Zilka, Debtor, Eric Bononi, Trustee of the Bankruptcy Estate of Stephen Zilka, Movant v. Bayer Employees Fed. Credit Union, Respondent. No. 05-25205-MBM. July 16th, 2009. In a nutshell, “the Bankruptcy Court held that: (1) lender’s issuance of account statements to debtor-borrower, indicating that outstanding loan balance were $0.00 due to its its “charge off” of loans, was mere accounting procedure, that was not legal equivalent of its forgiveness of loans; (2) issuance of IRS forms was not in nature of “admission” that loans had been forgiven; (3) issuance of IRS forms did not itself operate to legally discharge debtor from further liability on loans.
On December 15th, 2009, In the Court of Appeals ~ State of Arizona ~ Division one ~ Amtrust Bank v. Fossett ~
The Court held “that while issuance of a Form 1099-C may be prima facie evidence of cancellation of a debt, the lender may rebut that evidence by showing that when it issued the form it did not intend to forgive the obligation.” The Court went on to say that, “generally accepted accounting principles require that when a [retail] loan is past due for a specific period of time, the lender must reclassify the debt as a loss and write it off.” See Kelly v. Wolpoff & Abramson, L.L.P. “In that circumstance a lender may or may not decide to cease trying to collect on the debt.” See, In re Zilka, 407 B.R. 684, 689 (Bankr. W.D. Pa, 2009). Amtrust Bank successfully argued that it issued the form not because they intended to cancel the debt but because it was required to after the debtor made no payments on the loan during a “testing period” pursuant to federal regulations. Read the entire Opinion.
Looks like it is perfectly permissible to issue a 1099-C AND still seek a deficiency.
Can't have your cake and eat it too. One or the other. The 1099 means that the lender is writing off the debt. Can't collect a deficiency AND write off the same debt.
Kevin M. Lancaster - Willson said:Looks like it is perfectly permissible to issue a 1099-C AND still seek a deficiency.
Can't have your cake and eat it too. One or the other. The 1099 means that the lender is writing off the debt. Can't collect a deficiency AND write off the same debt.
Kevin M. Lancaster - Willson said:Looks like it is perfectly permissible to issue a 1099-C AND still seek a deficiency.
Perhaps some courts within certain guidelines. Ran this by one of the largest legal forums and the consensus was that you can't have it both ways. They thought the Arizona ruling was "kind of cute" as the 1099 was issued but the bank hadn't actually written off the debt. Claimed it was informational.
But what if the borrower had paid taxes...
As always best to get in writing the intentions of the bank. And remember that even if they will not state they are waiving the deficiency, they still have a statute of limitations to deal with.
Steele
Oh, in the Arizona case it appears that the bank said it was going to eat the cake (issued 1099) but then kept it :>)
The basic premise is still correct. Can't write off a debt and then collect it.
Steele
Taken from -http://illinoislawnews.net/?p=360
If the lender 1099s you and later seeks a deficiency judgment, the lender would have to issue a revised 1099, that’s all. So the issuance of a 1099 does not bar a deficiency judgment. Technically, the lender can 1099 you AND file for a deficiency judgment. You have to keep in mind that the lender could still get a deficiency judgment after a 1099 is issued. The only sure elimination of both the 1099 and deficiency judgment is to file bankruptcy before the 1099 is issued.
I’ve heard that in a foreclosure my lender can 1099 me for “forgiveness of debt.” Can they 1099 me and get a deficiency judgment against me too?
Usually, if a lender 1099s you, the lender will not seek a deficiency judgment. This is just how lenders operate, not the law. By law, the lender must issue a 1099 after a foreclosure or short sale. The issuance of the 1099 does not mean that the debt is erased by the lender. It just means that the forgiven debt is taxable to you.
There are several cases that deal with this topic: In re Zaika, a PA bankruptcy court case and AmTrust v. Fossett in AZ are a couple that summarize the law.
If the foreclosed property was your primary residence,then you have no income from the 1099 by law under the Mortgage Debt Forgiveness Act. If the property was not your primary residence, then you will have phantom income from the 1099 to deal with.
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