Deficiency Judgements And 1099
I am trying to understand when the lender will have a deficiency judgement or send a 1099 to the borrower on a short sale or a sheriff's sale.
Do you just ask right up front when you are negociating if they will render a deficiency judgment or record a 1099 for the difference. What is the wording that you use?
Is there any more likely hood that they will do a judgement or 1099 because it is a short sell vs a foreclosure?
Do junior loans do this more often than senior loans.
I do not want to leave my clients in worse shape. I want to give them the possible options and let them make the decision.
Any insight or experience is appreciated.
Brenda, the unspeller
Brenda, in my experience, predicated upon State law, it's an either/or situation.
Either they forgive the debt and issue an IRS form 1099, OR, they pursue a deficiency judgment and attempt to collect. If their judicial methods fail, they can (at a later date) write the debt off and issue an IRS form 1099. They can't forgive the debt and still pursue it.
Sometimes, the lender will have a strict policy about pursuing deficiencies. They will, irrespective of the situation, or likelihood that they will collect. I believe that if collection efforts fail, they will eventually write of the debt and issue an IRS form 1099. Othertimes, it will be determined on a case by case basis.
Some states are barred from pursuit of a deficiency.
I have found that juniors are more likely to pursue a deficiency. They oftentimes agree to release their security interest (mortgage) to facilitate a short sale.... but do not release the mortgagors from their personal responsibility for the balance.
Of course, in the case of BNK, that personal liability is removed, too. [ Edited by TheShortSalePro on Date 01/09/2004 ]
Anyone have an example of a good bullet proof disclosure document you use in regard to disclosing to a homeowner that a lender may send them a 1099 for the difference of the loan amount and the short sale?
In the overwhelming majority of short sale situations, the issuance of an IRS form 1099 is a non issue. No big deal.
The likelihood is that the "income" derived from forgiven debt is exempt from tax.
Just have the Sellers acknowledge that you have recommend that before entering into any real estate or financial transaction, they consult with an attorney, and their professional tax advisor.
Nothing fancy. No need to reaise a red flag.
>> Of course, in the case of BNK, that personal liability is removed, too.
Is BNK Bankruptcy
That advice is contrary to what I was made aware of, I was under the impression that even when a lender shorts the note, they are not giving up their rights to file for a deficiency with the homeowner.
Further I was under the impression that unless you get in writing from the bank upon acceptance of your shorted offer amount that they were accepting this as full payment they once again have the right to pursue a deficiency with the homeowner, issuing a 1099 for the difference in the shorted amount.
I was under the impression that you should have a document signed by the homeowner disclosing to them that they could be responsible for this amount per the 1099 just to CYA.
Rehabinator, so as not to further confuse this thread... I'll PM my reply to you.
[ Edited by TheShortSalePro on Date 01/11/2004 ]