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. 

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Permalink Reply by Paul Jones on September 4, 2011 at 5:11am
absolutely one or the other but not both. in the absence of the mortgage relief act the short seller would be paying taxes on this forgiveness. it's absolutely over at that point. the mortgage relief act is absolutely independent of this tax law.
Permalink Reply by Paul Jones on September 4, 2011 at 5:13am
carol i have no idea where you get your info. the irs website would never say that. once a 1099 is issued there is NOTHING to sell.
Permalink Reply by Paul Jones on September 4, 2011 at 5:51am
incorrect harry. what makes your cpa more right than actually calling the irs which i have done. im happy for you that you put your faith in someone who knows nothing more than anyone can by doing their own research.
Permalink Reply by Paul Jones on September 4, 2011 at 6:13am

Harry, my short sale letter specifically states "there will be no further collection activites associated with any such "forgiven" amount." Agree that I am safe?

Permalink Reply by Paul Jones on September 4, 2011 at 6:32am

Harry, I do not think approval letters that say they are issuing a 1099c omit verbiage like the one that was in my approval letter so they can try to collect later. My guess is that it has never happened. If you are so risk averse you will scare clients about things that probably have never occurred.

 

I also believe you are playing on words. I stand by the fact that a 1099c unequivocally waives all rights of the lender to later come back and pursue the money forgiven.

 

What you are talking about is the lenders right to amend or negate a 1099c. That right probably exists but I doubt it has ever been done except for legitimate mistakes.

 

Permalink Reply by Justin on September 4, 2011 at 7:36am

This conversation is looking to get a little hot and I am wading into a rather deep pool with my very 1st post.

Allow me to present a scenario to you:

Seller Joe sells his property for $150k which includes Joe bringing $2500 cash at close and his unpaid bal. is $200k and gets 1099c for $50k.

Investor reserves right to pursue.

Investor subsequently discovers Joe was sitting on substantial liquid assets and alleges fraud on Joe's part.

My point is that all of this hand wringing over right to pursue and obtaining a written waiver is quite over wrought UNLESS there is fraud.

Show of hands here, how many cases do all of you know where the investor is pursuing the deficiency? Serious question, not trying to be smart. I know of none, but that's just me.

Deal with the 1099C and whatever forgiveness the laws allow and move along. Tempest in a teapot in my humble yadda yadda. Please folks, calm your sellers nerves over not getting the written waiver.

 

And Yes, technically, BOTH could happen, obviously. 1099c and pursuit. Well the 1099c is GONNA happen. The pursuit...ehh

Permalink Reply by Smitty on September 6, 2011 at 10:48am
Harry, I spoke with an accountant and an attorney today.  They both stated if the 1099C is issued, it's a done deal and you're right, if the 1099C is amended then the lender can pursue.  Neither knew of a case study though.  They follow case law when advising clients and they both said in all their experience, they have never run into a lender seeking to collect the balance after the 1099 was issued.  They both said if they were advising a client, that once the 1099C is issued they would let the client know they were off the hook.
Permalink Reply by Smitty on September 8, 2011 at 1:39am

This is what I was sent:

"A 1099-C is not forgiving a debt. It is a cancellation of the debt. It means they have ended collection effort and filed the amount as a loss against their tax debt as if they had paid your debt out of their pockets (which is effectively what they did). The IRS treats this as them having given you the money to pay the debt, and that becomes part of your income amount. Your will generally owe taxes on that. How much depends on your overall financial situation. If you are insolvent, you probably won't owe any taxes.

They can still treat the debt as a basis for refusing to do business with you in the future. For example, that bank may refuse to loan you money, or even open an account with you, forever.

The amount of the short sale would be applied against the original debt and that much is effectively paid. The amount they "give" you as stated in the 1099-C is also to be applied against the debt. If this results in a zero balance, then the debt is done. If what they "give" you is considered a new loan, then it isn't income and a 1099-C is not applicable. If they "give" it to you not as a loan, then it is income. It cannot be both income and debt. It has to be one or the other (or, in theory, a split mix, but I don't see how that benefits them, or why they would bother doing something that strange).

A 1099-C is typically used in debt settlements for the remaining unpaid amount. If you settle a $5000 debt with $3000 payment, the remaining $2000 is a debt cancellation, a loss they count against their taxes. This is why when people dispute a debt amount, they should never just "settle" for a lesser payment, but make an agreement that the amount is corrected and then pay that in full."

Permalink Reply by Wendy Rulnick on September 8, 2011 at 2:10am

I'd like to ask the IRS - regarding rescinding a 1099-C.  How would you give someone "income" (which is the cancelled debt), then take it back?  That's like your employer paying you $10,000 bonus, then rescinding it the following year...  I guess it could be done, but what would the process be.  It might be a good question for the IRS.

Permalink Reply by Paul Jones on 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.
Permalink Reply by Jeff Payne on 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.
Permalink Reply by Paul Jones on September 6, 2011 at 4:54am

Fair enough Jeff. I'm actually done on the topic. Just to clarify my final opinion, I believe that a 1099C unequivocally makes the lender unable to pursue it further.

 

I think that other poster was saying that a lender can amend or negate a 1099c which I am sure they can, in which case would mean that a lender can pursue after issuing a 1099c by amending or negating it.

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