1099-C and deficiencies....

I have heard both things so I'm trying to find out what is true.

If a seller issues a 1099-C to the seller - can they still come after them for the deficiency on the sale of the house after agreeing and closing on the short sale?

I have a local bank, but the investor approval letter says nothing about if they can or will come after the seller later. (As opposed to other letters of approval I've gotten that flat out states they will not seek a deficiency - however I hear this is becoming more and more rare)

The negotiator just says that a 1099-C will be issued and reported to credit bureaus as 'debt settled for less than owed' and that 'Even though they don't seek a deficiency if they approve a short sale, they reserve the right to.'

I'm pretty sure they can if they want - as they reserve that right - however I'd like to hear your thoughts.

Replies

Richard Zaretsky September 8, 2011 at 4:52am

The IRS Instructions on the 1099C set forth their policy.

I also wrote on this years ago (nothing changed). Your issue has to do with what the heck does the letter (poorly drafted) mean?

You say the letter says nothing about the deficiency. Well, the negotiator says plenty. The letter does not USE the word deficiency, but the negotiator says plenty about it. First the report "debt settled for less than owed" is indicative of a waiver of deficiency because of the credit bureau lingo and it says it is "settled" as opposed to "open". Don't confuse this with "charged off", which means "we don't think we are going to be able to collect it, but we are going to keep trying".

You need to get what the negotiator to put his / her represenations in writing.

As far as the 1099C, some lenders are trying to collect after doing 1099C reports, but that is an issue to my knowledge not yet resolved by the courts. My bet is that the lender cannot have it both ways -- see the instructions.
- Julie Cendejas > Richard Zaretsky September 8, 2011 at 5:31am
  
  Thank you Richard! I have her emails in which she explained things - not sure I'm going to be able to get much else.....as hard as I keep trying!
  - Justin > Julie Cendejas September 11, 2011 at 2:07am
    
    See my reply above please regarding Idaho property.
- Wendy Rulnick > Richard Zaretsky September 8, 2011 at 5:25am
  
  Richard - Thank you for stopping by! We appreciate your presence on the site!
Kimberley Kelly September 8, 2011 at 2:32am

Initially, I agreed with Jeff...and still do. In California, debt is forgiven on primaries and now the secondary notes, and the 1099C is one choice..Lenders cannot do both. I loved reading Harry's points though. The Banksters can and will figure a way to go after people with lots of assets if they can. In California, I feel we have made it very difficult for them to go back on their approval letters releasing the right to pursue, the laws in place, and the 1099's erasing the option.

But...I am not a legal person, and I am a cynic so Harry may have a leg to stand on..time will tell.
- Justin > Kimberley Kelly September 11, 2011 at 1:53am
  
  California is a non-deficiency state.
  
  I assume from the original poster's profile that the property is in Idaho:
  
  Idaho: Lawsuit for deficiency must be brought within 3 months of the public auction. Deficiency limited by fair market value as of the date of the sale.
  
  That FMV being the case, how much deficiency would he be liable for in reality? And he has 90 days to worry if this is accurate.
Justin September 4, 2011 at 2:21pm

still waiting for the list of cases where the seller was pursued. seriously.
Paul Jones September 4, 2011 at 12:42pm

Paul Jones said:
yep "refining your trade" is going to kill whats left of your business. telling clients things that will never happen to them is not good for business.

just to make another point, in most cases the bank is just the servicer for a loan that the gov't is taking a loss on (a fannie/freddie loan). the bank if they go after money would just have to give it to fannie and freddie anyway. it's not worth their time and effort.
Paul Jones September 4, 2011 at 12:36pm

yep "refining your trade" is going to kill whats left of your business. telling clients things that will never happen to them is not good for business.
- Jeff Payne > Paul Jones September 6, 2011 at 2:39am
  
  Paul, let's keep this civil, you and Harry disagree but you don't have to be disagreeable, I have been watching this thread and it is a VERY important thread so let's keep it civil and stick to the topic.

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