IRS 1099-C for Mortgage Forgiveness OR Deficiency – The banks don’t get both!
Written on April 20, 2010 by Merre Ward
I received a call from one of my long time fellow realtors and good friend last week. We spent most of our conversation sharing war stories of short sales and the issues with the banks!
We finally got down to business and the subject at hand was my fellow realtor had a client who was very worried that the bank world come after him for the deficiency difference on the first mortgage after the short sale closed. Of course there was no language in the first mortgage short sale approval stating that they would accept the short with “full release of liability.”
Which brings us to an interesting issue! When a bank shorts on a 1st mortgage there can only take one of two options; they issue a 1099-C OR they pursue the borrower with a collection or legal proceeding for the difference. THE BANK DOES NOT GET BOTH! Now, that does not mean the banks do not try to sneak in a collection or two for the deficiency.
I was so concerned about what is happening in California that I picked up the phone and called the legal department of the California Association of Realtors. The nice attorney on the other end stated that the right to deficiency was not clear because there was no evidence of case law to support the issue. She also told me that the positive news was the new HAFA guidelines, which states that if a servicer agrees to a short sale through a HAFA short sale that all rights to deficiency are waived.
We shall see if this new government program solves the woes of short sales!
If you need assistance with deciding what the best foreclosure alternative is for you and your family, be sure to contact us at mward@kw.com!
