Can We Finally Put To Rest This 1099 vs. Deficiency Judgment Issue?
Everyone in real estate knows that we are the Short Sale Kings. While there maybe some pretenders to the throne, they are just wannabees seeking to find refuge riding upon our coattails.
I mean we don’t mean to be cocky but it’s nice being THE SOURCE for Short Sale information. Well I guess that sounds a little cocky but so what, it’s true.
UPDATE March 15, 2009: We’re excited about the emails and comments that we have received about this article. If you are new to our site and reading this article for the first time, be sure to read the dozens of comments below the article as there is a ton of great, “real-life” info and questions from the general public about deficiency judgments.
We teach and execute short sales and it always amazes me..still…in now 2009, in the midst of arguably the best real estate market EVER, how many agents out there are still being fed bad information.
I get emails from around the Country from agents asking themselves ..HUH..after reading something on this website or that website. Heck, one could make one heck of a living just straightening out the misinformation being spewed on Active Rain, that is of course if people on Active Rain would actually PAY for their professional education.
Ok, maybe that was a cheap shot, I am sure there are quite a few agents on Active Rain who take their profession seriously and have paid and educated themselves to be proficient short sale executors. I just wish they would actually speak out when they see bad stuff being said and corrected the misinformed poster.
But I guess actually telling someone that they’re full of crap on Active Rain goes against house rules. So everyone exists in a Delos-like, Utopian West World where you’re ok and I’m ok, and Mary Poppins is always singing on some Austrian hillside.
Yikes..excuse me while I throw up!
Recently, a real estate agent posted some drivel trying to explain the issuance of a 1099 in a short sale. I will admit, it was one of the better attempts I have seen on Active Rain by someone trying to explain this but it fell a bit short. It was a “nice post” but a bit technically wrong.
As I am one half of the Dynamic Duo known as the Short Sale Kings, The mighty Sultan of Short Sales, let me take a moment to set things straight. Maybe…just maybe, there is one agent out there who gives a crap enough to actually want to learn this.
So while I am waiting for my blueberry muffins to cool, let me address this.
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There is no such thing as a deficiency on a short sale. We find realtors ALWAYS miss this. Or get terms interchanged.
Forgiveness of Debt and a deficiency are two separate and distinct situations and the terms do not mean the same thing whatsoever and the distinction is VERY..VERY..important.
A short sale is a negotiated settlement, short payoff on a mortgage. PAYOFF. When a short sale is completed, the bank issues a SATISFACTION of the mortgage AND RELEASES the borrower from all obligation. Once a Satisfaction of Mortgage is filed and the Release of Mortgage is obtained, there is NOTHING from which a deficiency JUDGMENT can be obtained. The mortgage has been SATISFIED and the Borrower RELEASED.
In this instance a homeowner may get a 1099 and may be liable for taxes on the debt which was forgiven.
However, if a home is actually foreclosed, and the bank sells the home as a REO and they sell it for less than what is owed, then the bank, in certain states, can obtain a deficiency judgment for the balance. In Florida it’s actually written in the Final Summary Judgment of Foreclosure.
Now here’s the big difference MOST realtors don’t grasp and have a problem relaying to their clients.
Let’s say that the mortgage balance with fees and costs is $300,000. The short sale is completed on the house for $200,000. The amount of debt forgiven is $100.000.00. The 1099 , if issued, would be for $100,000.00. Does this mean the homeowner owes the IRS $100,000.00..NO OF COURSE NOT!!
This is treated as ordinary income in most cases and the homeowner would have to pay taxes on this new found “income” according to their tax rate. Let’s say they are in a 33% tax bracket…then they would owe the IRS $33,000 theoretically…I say theoretically because there are a NUMBER of maneuvers and strategies that any half decent accountant can do to reduce this IRS debt.
Now..on the other hand…the same house is actually foreclosed on by the bank. Same $300,000 outstanding debt, same price on re-sale of $200,000.00 ..now the bank has what is termed a deficiency of $100,000.00. Based upon their Final Summary Judgment ins some states, they can simply go back to Court and they are entitled to a DEFICIENCY JUDGMENT for the ENTIRE $100,000.00!!
So as you can see…there is a HUGE difference here. By the way..check with your state, but here in Florida, this judgment, once certified, has a potential lifespan of twenty years and will continue to grow as statutory interest is applied and compounded while not being paid.
Other than bankruptcy and expiration this $100,000 judgment will continue to grow and grow over the years.
So when talking to a homeowner which situation is better to be in.
Real estate agents need to know the difference. There is a HUGE difference.
My muffins have cooled and you are now schooled..for free! You’re most welcome!
UPDATE February 2, 2010: We have been getting tons of comments and emails regarding this entire issue and we think we understand the problem many of our readers are having.
We have been writing from a point and perspective of “obviousness”. You see whenever we do a short sale it is obvious to me that I want clear and marketable title so that I can re-sell the property for a profit. So in that essence there can’t be any mortgages or liens on the property so we ensure that the mortgages in a short sale are satisfied and released.
As a part of our due diligence and promise to the Seller, we also make sure that he or she are also “released ” from the mortgage when the short sale is finalized. It is now apparent that many homeowners are getting screwed because they are dealing with real estate agents who:
1. Have no idea what they are doing
2. Have outsourced the file to someone else who doesn’t know what they are doing
3. Could care less what happens to the homeowner as long as they get paid.
That’s the only way I could explain the incompetence of an agent who advises a client to go through with a short sale transaction WITHOUT the payoff of the mortgage in default along with a release and satisfaction. Anything short of that in my opinion is malpractice and simply wrong.
Please make sure that your agent doesn’t screw up your short sale. Trust me, once they have their commission they won’t be back to help you when you find out that they did not obtain a full release for you. In that event you could indeed be left holding the proverbial bag.
I just could not even comprehend that someone would treat a client in that regard.
Sign up for our Short Sale Video Course so you can truly be educated as to the nuances of a short sale. You might find yourself making a few bucks! Now available on DVD!
Florida Deficiency Judgments – What is Fair Market Value …What is fair market value in determining a deficiency judgment by Sackrin & Tolchinsky, South Florida Lawyers since 1982.
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Appeal-Democrat, on Fri, 18 Dec 2009-In some states, the lender still may come after you for a “deficiency judgment” if he or she can’t get enough money when the house finally is sold. …
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Barry,
Something is still not clear to me… I have seen lenders accept the reduced amount and allow the property to be sold short, but I have seen them, in their approval state that this does not release the seller from potential further action from the lender to secure a definciencly judgement. If they do issue a 1099, then the debt has been forgiven and the seller knows that is the end of it (other than whatever IRS issues they have to deal with) BUT if the lender allows the sale and DOES not issue a 1099, it is my understanding that (here in FL at least), they have up to 5 years to try and seek a deficiency for the difference. They cannot do both (1099 and deficiency) but they still do have the option to seek a deficiency on a short sale IF it is not stated that it is a payoff and do not issue a 1099.
I have read this from some very credible sources and I have seen it in approval letters from lenders on short sales. I must say I have never heard of the lender actually pursuing it, but if it is true that they have up to 5 years to do so, then that wave may be yet to come and a seller is only really clear if they receive the word PAYOFF and, more importantly the 1099…?
Any clarification would be greatly appreciated…
Hi Janie, please understand that humans wrote that letter. That means they err. It also is quite boilerplate.
What most real estate agents forget, or simply do not know, is that they are in a NEGOTIATION. It is ok to say that XXX language needs to be removed. It’s ok to challenge anything that you are not comfortable with. We NEVER accept any letter that is not correct AND legal.
Most realtors accept the letter from the bank as hi..hip..hooray we’re getting paid…and don’t realize that the letter is incorrect.
A deficiency is a matter of JUDGMENt not of right and a lender can not insist upon that which has not been adjudicated…unless of course som seller who is being misrepresented by a johnny come lately short sale expert stipulates to a deficiency judgment becasue that’s what they were told. I doubt that would even be enforceable.
It may even bring liability upon the agent for misrepresenting the Seller’s intention to the lender.
Any short sale we are involved in is for FULL SATISFACTION and FULL RELEASE of the mortgage AND NEVER confers any continuing right to the bank to come after a “deficiency” that doesn’t exist.
The 1099 however isn’t that easy to get around but can be worked with by a good accountant after the fact.
When people bandy about the word deficiency I often wonder what the heck they are talking about. What comes about in Final Summary Judgment is the ability to obtain a Defiency JUDGMENT..one just does not have the right to some mythical JUDGMENT because they want to.
It’s a matter of law. There is so much misinformation out there. We teach people how to actually READ a final judgment as I guess most agents never have and are just winging it..like the person who wrote the Active Rain piece referenced above.
Ok Barry, I see, we are saying the same thing. That when a Payoff and Release of Mortgage is secured that there is no deficiency that the lender could go after at a later date. The KEY is for the agent to MAKE sure that the short is handled this way. I was concerned an agent would assume that ALL short sales (without the proper negotiation and wrap up – ie Payoff and ROM) would wipe out the seller’s chance at being hit with a lender seeking a deficiency judgment. You cleared it up above, that the Agent Must READ the approval and make sure they secure the Payoff and ROM for their seller in order to free the seller from any chance of later problems with the lender. Thank you for responding.
Even though I am not a realtor, I am a short sales specialist in training, I found your article helpful. That being said, I disagree with your fundamental premise that a short sale does not have a deficiency. A short sale does have a deficiency! A deficiency is the amount of debt remaining unpaid from the forced sale of a security. And in order to “forgive a debt” that debt must have already existed. And that forgiven debt was triggered by the deficiency. In other words, you can’t have a
“forgiveness of debt” issue, without a deficiency, but you can have a deficiency without a forgiveness of debt issue. Lastly, I found your article on black mold illuminating too.
Jerry..thanks for your comment. Heads up..you may want to enroll in our short sale course at http://www.shortsalevideocourse.com
You mention that you are a short sale specialist in “training”. We are’nt in “training” we do this for a living, live without a net. I was pretty clear and can’t waste time with people who will not get it straight. If you feel the way you do, then you go with that and I wish you great success (the rest of you who may be reading this psst…he’s wrong and doesn’t get it!)
Jerry we posted your comment..we don’t delete opposing views…however erroneous they may be!
I heard although you settle on the short sale and the bank doesn’t come after you, those deficiency’s will be sold to collection companies for pennies on the dollar and they will come after you. Can they do that?
Hi Kate…you wrote your answer in your question. You wrote “settle on the short sale “.
If you settle a debt then there is nothing for anyone to come after. There is nothing further to collect upon…the debt is settled. There are literally tons of people out there, many of them real estate agents, who have no clue…as stated above in this article as to how to explain this to their clients. They get bad information from others who don’t have a clue and perpetruate the myth.
If your house gets sold THEN the bank may seek a deficiency..but that all depends upon the state your in, how the judgment was written…etc
But in a short sale, you can not have a deficiency. You may have tax implications based upon the amount forgiven…but they don’t use collection companies to come after you for back taxes…the IRs does that well enough on their own.
For you information and illumination: 1) A short sale and a short payoff are different. 2) I agree with you that you should ask for the short sale to be FULL SATISFACTION and FULL RELEASE of the mortgage. That is what transforms the short sale into a short payoff…sort of. But, if you are the professionals you say, then you know that you don’t always get what you ask for, right? 3) The reason you ask for the full satisfaction and full release is to try to eliminate…guess what…the potential deficiency and it’s byproduct…the 1099. The bottomline is unless a person is an accountant they should try to inform and educate their clients, while at the same time recognizing they are incompetent to give people tax advise. Keep up your good work guys!
I received a short sale payoff letter from Indy Mac stating “Indy Mac has approved the proposed short payoff with the following conditions. As one of their conditions they have put Indy Mac reserves all deficiency rights as provided by the note/deed of trust and or security agreement according with the local and federal law. The short payoff also states at the bottom, if all conditions are followed borrower will be released from the lien. I also asked the negotiator through email will the seller be receiving a 1099, she said yes. I then asked her will they come after the difference from the short sale and she wrote Fannie Mae reserves all rights to the deficiency. So to me either the people working at these banks do not know what they are talking about or the information being released is incorrect by the bank.
I don’t understand why they make it more confusing by saying they will receive the 1099 and retains deficiency rights? It has to be one or the other, right?
I also asked them to take out the wording but they said they can not or they will not approve the short sale.
If for some reason the seller gets slapped with a bill from what ever collection company- do you think this will hold up in court if they have their short sale approval letter?
“short sale payoff letter …borrower will be released ” meaning there is nothing else owed. For credit reporting purposes they will probably say the loan was not PAID IN FULL but rather settled.
Once the satisfaction of mortgage is recorded…which it must as you are selling the property..then the lien on the property is released as well.
Remember, none of these people are lawyers. If you need further confirmation call your attorney and ask him or her what you have asked here. If more people would take the time to do so and to realize that these bank reps are just 15 per hour employees, then there would not be so much confusion.
Hey Jerry..why would anyone even get involved in a short sale if it wasn’t a short payoff? Huh???
Katie…here’s another example of what I was saying…Jerry as well confused his terminology . He wrote” potential deficiency and it’s byproduct…the 1099″.
Wrong again!
People..listen up….the 1099 is issued basd upon the amount of debt that is being forgiven. It’s not the same as a deficiency…what is so hard to understand?
A deficiency is based upon the home being sold and not enough proceeds available to cover the amount owed. That’s on an AUCTION or SHERIFF”s sale wherein the foreclosure runs its full course.
The 1099 MAY be issued on the amount of debt that is forgiven when a short sale is approved.
Man…is there any wonder why we moved our focus to Internet Marketing…this is ridiculous.
You are appartently well versed and I even commend your (cockiness)confidence. Wish I spoke to you before my mess. Short sale attempt was very close until the lender required me to sign a voluntary DJ for the full balance. Also insisted my wife who is not on the note sign too. SS realtor said it’s a deal breaker if we don’t sign. We did not and the house foreclosed. Now they are filing a DJ against myself and my wife for $305K. They did 1099A me for $400k, the loan balance before they sold the house. You sound so on top of your game so please make some sense of this!
Oh and just for disclosure I am an LO and well versed in loan origination but would never claim to be a SS expert. That’s your deal!
Thanks!
Hi Vito..I’m not being cocky..just tired of agents screwing it up and getting their clients in trouble..as so it seems with your deal.
I have to ask you something and it’s where again a lot of agents screw this up. You said above that the bank ” required me to sign a voluntary DJ for the full balance”…I don’t believe that to be possible. Here’s why. A DJ is an order of the Court.
No one can adjuducate that outside of court…unless what they were asking you to do was to STIPULATE to a DJ…which is beyond what I have ever seen.
You sure they did not ask you to sign a Promissory Note for the balance? That’s a common BS trick that some pull. They know most agents don’t know how to combat that.
Then you say they are “filing a DJ”..whoa..you left something major out of your comment. That major part being what did you owe and what did they re-sell it for. There can be no DJ unless the home was resold and the proceeds were less that what was needed to satisfy the loan. The DJ, depending upon what state you are in, would normally be the difference of what you owed less what they received by selling the home.
Then you’re telling me they sent you a 1099??? Exactly what debt did they forgive that is making them treat as ordinary income being given to you?
Plain and simple…if the info you supplied above is correct you are being screwed big time.
Unfortnately, it’s time for you to get your facts and figures in line and hire a lawyer. If not anything they filed will probably stand and cause you a lot of problems.
Much worse is the 1099 you say they issued you for $400,000. Becasue you are going to have to pay taxes on that “gift” they gave you.
I have never seen anything like this….you need to rally the gang and fight this ..BIG TIME!!
Hey Barry,
Thank you for the quick response. Yeah they really did send me a Voluntary DJ not a promissory note. By reading your take on it though I have to believe it was an in house genarated document that isn’t worth crap. If I knew that at the time I would have signed it, let them SS the house and wipe their ass with the paper. That’s done unless the realtor may hold some libel for not properly disclosing that to me.
Now as far as the 1099A. That was issued after the foreclosure. The outstanding mortgage balance was $400,000. The house was sold for $150,000 shortly after and they never issued a 1099C but instead are seeking a DJ for $305,000 which is the difference plus all other fees they attached.
Here is the real kicker that people need to be aware of. I cooperated fully and disclosed everything in good faith and hopes of keeping our home. It didn’t take long for me to see that Mitigation Dept. and Collection Dept. are one in the same. They (Century Bank of Sarasota) have made every attemt possible to find or substantiate allegations of misrepresentation to no avail of course. See on the surface even I can understand them taking a close look. The mortgage company that I used I them went to work for some time after the closing. I never had any prior experience in the industry and didn’t think that it was a crime to become an LO.
Oh and thanksalso for the strong advice to retain a lawyer. I am as you suggested, putting a file together to present to the attorney. I know the stronger and more I put into it, the better my chances with an attorney. I really want to go on the offensive here and sue their asses for neglect in their underwritting supervision among other charges. See the OTS (Office of Thrift Supervision) currently has a Cease & Disist order that totals 17 pages of charges which I am reviewing and prioritizing. Forgot to mention that I also have an email from an idiot in their Mitigation Dept. to the realtor telling the realtor (you may not believe this) to tell me that they are investigating both civil and criminal charges against me. Thank again and any thoughts are appreciated!
VITO
Hi Barry:
I’ve read so much online about SS/DJ/ROM and feel as though its starting to make some sense to me. My short sale was approved by the bank (Chase) last week.. But I’m not clear if their approval letter clears me of all my indebtedness–as there is no mention of the amount I own to them for the missed mortgage payments. They include Brokers commission, Sellers closing costs, and taxes but nothing about the $28,000 in missed mortgage payments. My realtor does’t believe that is a problem. She said the language in the letter stating:
“In order for Chase to release our current lein(s) on the property and waive the remaining defieicncy balance on the account, totaling $134,629.88 you must sent all of the following to Chase by 7/29/09:…” means that everything is included. I’m worried however, without including the missed payments (making the deficiency nearly $162,629)…Is it implied that they are forgiving this as well?
Thanks, Larry
Once you close on the sale, all debt to the bank is gone. A short sale is a short payoff meaning the bank has agred to settle and accept a payoff of your mortgage at an amount less than you owe.
Your agent and title company should have negotiated to make sure that in addition to the satisfaction of mortgage that you also were given a full release. I doubt that the bank will look to you for mor emoney…HOWEVER…Uncle Sam is not so forgiving. If this was NOT your principal residnce, you could have a big tax burden.
The bank will issue you a 1099 for the amount of debt forgiven and it will be treated as ordinary income by the IRS and they will expect a tax payment as if you actually made the money. For instance if your mortgage balance was $200k and the bank accepted a short sale for $130k then the IRS treats it as you just made $70k and they expect you to pay taxes on it.
The good news is that if you qualify, you may not be liable for the payment of any taxes on the debt forgiven. A knowledgeable realtor should have known that. Let me know if you need more info on this.
Hi Larry;
This is just my personal experience. My first short sale approval was with chase mortgage. The approval letter stated similar conditions agent commission, closing cost, etc….. After the closing I checked with public records to see how the release of mortgage was stated and i was able to pull up a certificate of satisfaction/release of mortgage by Chase stating the lien fully paid and satisfied releasing borrower from mortgage.
Kate
Hi Kate:
In everything I’ve read no one mentions the ‘missed payments’…since that is a debt owed, couldn’t the bank come after that as a separate issue? why is that number forgotten in the forgiven debt?
Larry the payoff would have included the missed payments. I thought that was understood.
Hi Larry:
It is my understanding the amount of backed due mortgage payments get added onto the payoff amount. Typically when a mortgage company issues a payoff to the borrower that payoff would include all late charges and any late payments.
Unless they made you sign some kind of affidavit acknowledging you owe them that amount and they will seek personal liability against you I don’t see how they can come after you to pay after approving the short payoff and a certificate of satisfaction for release of mortgage.
Kate
Ok, well I guess that will show up on the HUD-1, as it isn’t accruately reflected in the short sale agreement letter which only accounts for closing costs, taxes and commissions. Thanks.
Larry …Katie and I have both been saying the same thing…it’s included in your payoff. You won’t see a breakout on the HUD outlining any back payments. You will see a total paid to the bank and their letter to you is what they want to satisfy the mortgage in your short sale. Don’t worry about it…the back payments are in that payoff figure.
Barry,
Here is the verbiage that was included on the final paperwork of my short sale agreement with Bank of America. Now from what you are saying, they have indicated a “short payoff” and therefore would have a difficult time pursuing a deficiency judgement because the payoff indicates paid in full or paid by settlement. Is this correct. I have contacted BoA to try and remove all “deficiency” verbiage before I sign anything, but have had little success. Any recommendations?
Thanks for your help,
Luke
IMPORTANT MESSAGE ABOUT THIS ACCOUNT
This letter will serve as BAC Home Loans Servicing, LP’s demand for payment and advises you that BAC Home Loans Servicing, LP and/or its Investors and/or Insurers have agreed to accept a short payoff involving the above referenced property and the referenced account(s). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer from the buyer referenced in this letter.
WHAT THIS MEANS TO THE SELLER
BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy. Furthermore, there may be tax consequences associated with entering into a short sale. The seller is encouraged to seek guidance from an independent tax advisor, and/or an attorney, before proceeding with the short sale.
If this short sale is contingent upon BAC Home Loans Servicing, LP and/or its investors receiving a promissory note, we will reserve the right to collect the full amount on the new promissory note which may lead us to pursuing a deficiency on that balance should the need arise. If the short sale does not close, then we will pursue all remedies under our note and mortgage. This offer is contingent upon BAC Home Loans Servicing, LP receiving a properly executed and notarized Promissory Note, if applicable, to this short sale transaction.
I don’t know what state you are in but just because they wrote this in a letter doesn’t make it legal.One key would be wherein they say they can’t if “prohibited by law”.
Next thing, and I am sure your buyer will require this…is are they supplying the buyer with a release of any lis pendens and satisfying the mortgage? More than likely they are and in that regard that pretty makes their letter a moot point. A lot of this stuff is boilerplate crap and the people sending them out don’t have the authority or knowledge to change the letters.
What should you do? Well only you and your attorney know what’s best for you (notice I did not say anything about a Realtor…don’t even ask the Realtor)..if you have questions speak to an attorney.
However if I were you I would be looking at what is to my best interest. A short sale wherein I don’t have a foreclosure and even in the unlikely event that a bank could come after me (I believe they can’t) you are still in a HELL OF A LOT better situation than being foreclosed upon and that’s INCLUDING whatever potential tax liability you may incur…but hey…that’s just my opinion!
Barry,
Thank you for your information regarding my short sale. The whole thing makes me nervous. I actually assumed the mortgage after my girlfriend and I broke up and had her sign a Quit Claim Deed. The assumption released her from liability of the loan, but now the title company is telling me that the Quit Claim Deed never vested. It is recorded at the County’s Assessor so I do not know what they are talking about.
To respond to you, I am in Nevada, where they have the ability of recourse. I am hoping that they just send me a 1099.
Thank you,
Luke
Wow, this is very interesting stuff, but what would you do if they ask you to sign a promisory note?
Barry,
In no way shape or form am i the Messiah or short sales. I’m an agent that has done about 80 SS in the past 5 years and all i can say is that we are committed to continuing to learn.. That being said, I humbly ask for your input. Up until recently, i would have agreed with you 100% on everything. And i will repeat, EVERYTHING….However, at least in the world of Fannie and Freddie, i have seen them retain language that says they retain the right to pursue any deficiency. They won’t remove it. It’s standard and the reason they won’t remove it because they have been sued in the past for discrimination for who they will release and who they won’t release. Therefore, to avoid possible discrimination, they are not budging. And the servicing lender does not have the authority to deviate from this policy. Now i’m sure that what i am perceiving as the “old way” will work with some of the smaller SMI’s, but with Fanny & Freddie making up 2/3 of the smi market, that’s a big chunk..Can you please advise? Thanks, Steve
Barry,
Very interesting notes on the subject. I am not a real estate agent, nor in the mortgage business. I am someone who got in over my head with a short term rental property outside of Disney in Kissimmee (I live in Illinois). I talked to a Realtor last week about going short. At this point I am a bit confused (some of the notes have me more confused then before I started reading).. The Realtor is telling me that Chase will give a full release and I will owe nothing… I said that seems to good to be true.. From what I read on your site I see I will receive a 1099A and may have to pay the difference in deficiency judgment.. I am one of 5 people who went in on the house. My name is the only one on the Chase note (better rate). I assume that means I am the only one who will receive the 1099 and the possible judgment.
Lets say I go with the right real estate agent and law firm – I get a full release from Chase, what should I expect?
* 1099 – 33% of the loss (owe $218K – sells short for $170K for a shortage of $48K plus expenses or $15,880 + in personal income taxes).
* Judgement for the shortage?
Sorry if the questions have already been answered, I am just a bit confused. At this point I have signed nothing with the agent nor have I talked to an accountant (still looking for one that works with shorts).
Thanks – I see I have a lot of research to do..
Hey Dan,
Thanks for stopping by. Let me see if I can help you on this.
Where a lot of people get confused and where you seem to be confused is to when a deficiency judgment and 1099 come into play.
If you are doing a short sale, the amount of debt that is being forgiven can be subject to taxes as ordinary income. Check with your accountant to see what you may do to offset this newly found windfall
…there are several ways to reduce any such pending tax obligations that may arise from a 1099 issued as a result of your participation in a short sale.
Please understand that if you go the short sale route there will be no deficiency judgment. With doing a short sale you are settling the debt in full (at least that is what is supposed to happen…hope you have a realtor who knows what they are doing)
Here’s what you should expect.
If you owe $218,000 and the property is closed via a short sale for $170,000 then the amount of debt forgiven is $48,000.00. So the IRS would look at that as ordinary income (pretty insane isn’t it?), so you would be “potentially” liable for the income tax on $48,000.00 of “income” you are receiving.
So depending upon your tax bracket and the skill of your CPA, along with whatever agreement that you may have with your partners, your exposure may not be as great as you might think. It certainly is much better than a foreclosure on your credit record.
But that’s just my opinion. I hope you agree.
I recently had an investment property that went to foreclosure after SS attempts failed. I negotiated with the 2nd lien holder after the foreclosure to settle the 250k deficiency in exchange for a $16k promissory note. They did send the courthouse a release of lien and I received the original note back from the courthouse with it stamped “Loan Satisfied”.
Do you think they will send me a 1099 for the difference. The negotiator I was dealing with said they will, but like you said these guys make $12-15 an hour and really don’t know.
Hi Scottie,
Congratulations on getting your second mortgage negotiated. Even though you agreed on the promissory note, the reduction was significant.
In regards to your question about the 1099, the honest answer is…. maybe. We have started seeing some successful short sales get 1099’s from some institutions. I cannot tell you specifically which banks are doing them and which are not. Only time will tell on this one.
Thanks Barry. You are right, time will tell. January will be a tough month going to the mailbox every day to see if I have a dreaded 1099. I really wish Congress would allow investment properties to come under the same rules as personal residence in regards to forgiveness of 1099s on debt relief. I don’t think any elected official would want to support because the public thinks investors are one of the causes of the bubble….however investors are the ones who will get the ecomony going again. If we get kicked in the teeth relentlessly by the IRS, who is going to lead us out of this monstrous hole?? Your website is very helpful. Once I get myself outta my hole I will check back for some education from you to take adantage of the SS opportunities in the market.
I have to say I agree with Steve. The verbiage I’ve seen lately states they have the right to pursue a deficiency and we’ve asked to remove it and they won’t. So we tell home sellers that we cannot guarentee there will be no DJ. We do say that there is either a DJ OR 1099, but not both.
Lisa..it is very..very simple to understand. A deficiency JUDGMENT can only be ordered / granted by a Court..a JUDGMENT is a decree of the Court.
Once the mortgage is satisfied, and a RELEASE / SATISFACTION filed (which you had better be negotiating) There is absolutely no possibility of a deficiency JUDGMENT as there is nothing left to adjudicate. The civil lawsuit has concluded. I can’t make it any simpler than that.
The continued argument in this regard is truly insane. While there may be other tricks the banks may use to come after a homeowner who is not represented by someone who knows what they are doing, a deficiency JUDGMENT can not occur after a mortgage is released and satisfied…which happens in 100% of the real estate purchases we have ever made. It kind of would be tough to transfer marketable title without a release.
But hey…years later, Realtors still don’t comprehend this. Not saying you are insane or can’t comprehend anything…I don’t know you so nothing personal whatsoever…
[...] do you realize your credit will be ruined and the bank may come after you in the future for a deficiency judgment (FYI…we go over this in class), why would you do that if we can save your credit and show you [...]
[...] an uneducated agent, broker or advisor tell you otherwise…you can not be issued a 1099 AND a Deficiency judgment. Stand firm and we’ll discuss this tomorrow but these two animals don’t cross paths. [...]
Hi Barry,
I am in a similar situation as Luke above, having to deal with dreaded Bank of America. While I understand this verbiage around a deficiency judgement is worthless because you cannot pursue a deficiency judgement on a property unless it is foreclosed on:
BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above.
I am concerned about the second sentence in their approval letter (which I am expecting soon):
In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy.
I’m not sure if you’ have to work with BoA, but from what I’ve read everyone else they are not modifying their approval letters for anyone anymore. I know I will probably have to consult an attorney, but would the above phrase make you nervous going into a SS?
Well i finaly got the short sale approval from Bank Of America , The negotiator send me this letter from the investors approval. there is two things i dont like what it says first is the deficiency judgment and second is the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage ……can some one please tell me if this can happen .
“This letter will serve as BAC Home Loans Servicing, LP’s demand for payment and advises you that BAC Home Loans Servicing, LP and/or its Investors and/or Insurers have agreed to accept a short payoff involving the above referenced property and the referenced account(s). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer from the buyer referenced in
this letter.BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy.Furthermore, there may be tax consequences associated with entering into a short sale. Theseller is encouraged to seek guidance from an independent tax advisor, and/or an attorney,before proceeding with the short sale.If this short sale is contingent upon BAC Home Loans Servicing, LP and/or its investors receiving a promissory note, we will reserve the right to collect the full amount on the new promissory note which may lead to us pursuing a deficiency on that balance should the need
arise. If the short sale does not close, then we will pursue all remedies under our note and mortgage. This offer is contingent upon BAC Home Loans Servicing, LP receiving a properly executed and notarized Promissory Note, if applicable, to this short sale transaction.
Mike..and Ozzie…I’m not a lawyer, and you should verify things with an atorney first…however…let me just say that I or anyone for that matter could PURSUE anything I wanted.
But in order for me to obtain a deficiency JUDGMENT a JUDGE would have to grant it to me. These sentences were put into these documents to do just what they were intended for. To confuse and scare people.
Only a Judge, in a Court of law can grant a deficiency JUDGMENT. Don’t let any one else tell you otherwise. It’s going to be pretty hard to do since your Final Judgment of foreclosure will have to be cleared, the mortgage released or satisfied and title deemed marketable for the sale to actually happen.
So since you would no longer be involved in a lawsuit, there would not be any JUDGMENT to be had.
You see the trick here is in banks asking people to sign notes to continue their obligation. Don’t fall for that ruse.
Hi, Barry:
I’ve two investment properties in Nevada that are under water, and I’m considering short sale. I understand that I will receive 1099-c for the difference between the outstanding loan balance and the net amount lender receive from the short sale. I’ve also working on the insolvency worksheet, but can’t get the assets lower than the liabilities. can you give me some hints to eliminate the taxable income or at least lowr it? thanks
Hi Andrew, Thanks for the comment.
You need to speak to an accountant and probably a good attorney. I am not one to give direct legal or tax advice but I will proffer an opinion.
You will likely receive a 1099 for your “earned income” as a result of your short sale should a bank accept your request. One question that I have that a bank would also likely have is if your assets are greater than your liabilities, would they even entertain a short sale. If someone owed you money and you had the ability to collect by going after their assets what would you do?
Well in today’s economic climate, a bank still may entertain and approve a short sale but the IRS is a different matter altogether. The only way to lower your asset column is to have less assets. Or have a good accountant who can show you some depreciation or other tax strategies to de-value your current asset base.
Barry,
Thanks for continuing this topic…
I have a single family home in Orlando which is used for short term rental. The house was bought with 4 of my friends. We hold the house in a corporation but have the mortgage in my name. We are now having trouble keeping up with the mortgage and other costs. The house is listed with an agent for short sale. So far no luck. What would happen to me if we were to stop paying the note? Again the mortgage is in my name (my name only). My permanent resident is in my wife’s and my name. I have money in the bank and good in come. I do not have enough income to support both houses. To date the mortgage is paid on time. My partners and I no longer want to contribute to this home. We owe $218K and have the house listed at $165K. Even if we find a buyer, I would be looking for a full release from Chase. In foreclosure, could they come after my house and assets? Thanks.
Hi Dan,
Unfortunately, your predicament is all too common today. But you are doing the right thing, knowledge is power.
Let me start by talking about the different legal instruments we have in play here…
First, we have a deed. As you state in your question, the deed is held by a corporation. This corporation is made up of 4 of your friends. If you decide to refinance, sell, or otherwise convey ownership of this property, it will have to be done by whoever has authorization within your company. The Articles of Incorporation will define that.
Second, you have a mortgage. The mortgage is commonly used to describe both the actual mortgage document and the note together, so we will use “mortgage” when talking about them together. The note is the IOU saying you owe the bank money. The actual mortgage is the document that creates a lien against the real property using the note.
These 2 documents, although usually created at the purchase (closing) of the property, are mutually exclusive. As you mention above, you are the one that owes the money because you signed the note/mortgage. The corporation (4 friends) own the house.
Now, to your specific question …. “What would happen to me if we were to stop paying the note?”
As soon as you stop paying, the bank will report your late payments to the credit bureaus. This will start to effect your credit right away (as soon as reported). After a certain amount of time, roughly 30-60 days, your bank will try to contact you and try to work out payments. If something cannot be worked out, they will eventually file for foreclosure and see it thorough till they have the property back. Since the property is located in FL, and we are a judicial foreclosure state, they will file a foreclosure lawsuit.
You next question…. “In foreclosure, could they come after my house and assets?”
Remember, the foreclosure lawsuit is specifically a way for the bank to recoup the amount they have loaned you. They foreclose on the mortgage so that they can sell the asset (the home) to be able to just that. THEY CANNOT FORECLOSE ON YOUR PRIMARY HOME. Well, they can if you do not pay your mortgage on your primary home, but not in the case you describe above. If, however, the get the home back in the foreclosure, sell it, and still do not recoup the amount that they loaned you, they can file for a deficiency judgment. In Florida, this is allowed. The judgment would be for the amount of the mortgage and fees, less what they made when they sold the house. So for example, you owe $250k between mortgage and fees and they sell the property for $150k. They could then go back to a judge get a deficiency judgment in the amount of $100k. That judgment would be attached to you and your assets.
Now, if you do receive a deficiency judgment, they still cannot take away (foreclose) on your primary residence, IF IT IS HOMESTEADED. I assume you live in Florida. It will however attach as a lien on your property making impossible to refinance the home without first clearing the judgment…. plus all of the other great things judgments can keep you from doing.
I hope I was able to give you some clarification on these issues. Again, before you make such a large financial decision, I always recommend sitting down with an attorney and a CPA to go over all of your options.
[...] We Finally Put To Rest This 1099 vs. Deficiency Judgment Issue? A 1099 and a deficiency judgment are two separate and distinct documents. One may be [...]
But what we all really wanted to know is how were the blueberry muffins?
Dan you made my day! As always, including this morning, the blueberry muffins were fantastic..although I have had to get used to the low-fat variety. Thanks for the comment and the visit.
Hi Barry. I have read nearly all your posts and I’m quite impressed with your knowledge. Perhaps you can give me some insight…
Sold our Florida home via SS in 12/08. Both 1st & 2nd loans were with WAMU/chase. They accepted “Reduced Payoff” nothing mentioned about any right to pursue balance on 2nd. We owed 401k on 1st and 52k on 2nd. They accepted 270k as reduced payoff. Both loans were referenced in the demand letter and they stipulated seperate net proceed checks were necessary for each loan. We closed. They issued a 1099-C for the 1st, but not the 2nd. Should we be concerned that we didn’t receive one on the 2nd?
We were careful not to sign a promissory note or anything as such. Chase filed a ROM for each loan. The ROM for the 2nd loan was actually filed 10 days before the ROM for the 1st.
One year later we start getting calls from a collection agency for the balance of 52+k on the 2nd. Of course we told them to “get lost”. They typically only call once every 2-3 weeks or so.
Funny though, when the collection agency contacted us, we contacted the title company and requested a copy of everything in their file. To our surprise, the SS demand letter in their file had 1 extra bullet on it that stated “WAMU reserves the right to pursue a deficiency balance on the 2nd loan # XXXXXXXX.. Our SS demand letter we received from the title company did not have that last bullet on it and the copy of the one we received, signed and sent back with all other closing documents was not in their file anywhere. It appears the the lender may have persuaded the title company to replace our copy with their copy that had the extra bullet.
We also requested a copy of our realtors file, and as we suspected, his copy also had that extra bullet. Go figure.
At any rate, I surmise (per your previous posts) that since we the ROM for both loans were filed, they shouldn’t be able to come after us for anything. However, sure would like to “sue the pants off” the lender, title company and our realtor since it appears all may have failed to perform due diligence regarding the transaction.
Would like to know if you have ever heard of this happening to anyone else. Thanks for such a great place with so much interesting information.
Hi Maria…what you have written is unbelievable. Someone , somewhere, seemed to have pulled a fast one on you. Have I heard of this happening before? Well I have heard of that clause before…but never heard of an agent, title company and lender colluding to stick it to somebody…but I can’t say that I am surprised.
I don’t have a copy of the letter so I can’t say for sure what the bank reserved rights upon. You mention a “reduced payoff”..and a ROM…did you notice if a satisfation was filed as well? Also did you notice if the release was actually a full release versus releasing the property but keeping the note in effect. There are, as you found out some very sneaky characters out there. Since you are in Florida perhaps you can give Erik Wesoloski a call. (www.wesoloskicarlson.com) He works with us on our short sales and can advise you of your legal rights AND whatever action he advises that you can take. We keep telling people to make sure that they have an attorney review their closing documents and this is exactly the reason why.
I will also email Erik and let him know that you may be calling.
Barry –
Thanks for responding. Yes, the ROM filed with the county actually states: WAMU/JP Morgan Chase does hereby acknowledge that it has received full payment and satisfaction of the same, and in consideration thereof, does hereby cancel and discharge said Mortgage.
Is that good enough so as not to worry that they can’t legally come back and say we owe anything on the 2nd Mortgage? Both ROM’s (each stating exactly as above) are filed.
I think we’ll be okay and if the collection agency keeps calling, we’ll send them a copy of the filing and then change our phone #.
I might still call your friend though, just to see if there is any action we can take against the lender or title company. Thanks for your help.
Barry,
Thanks again for keeping this open..
I have asked questions in the past concerning short sales.. I recently got an offer on a short term rental single family home in Orlando area. We owe Chase $216K, the offer is for $175K. My Realtor sent the contract for review and signatures. I asked for a contingency concerning “full release”. She sent a Short Sale Addendum for me to sign. The buyer has signed. Point #1 on this addendum is concerning Approval of Lender. This point says the contract is contingent upon Sellers Lenders (and all lein holders) approval of this purchase. It goes on to state that the lender agrees to accept a payoff which is less than balance and will grant release and satisifaction of the mortgage.
This looks like standard wording. Have you seen Chase accept something like and grant the full release? Is there something else I should be asking for? I will be having an attorney go over everything. I am in Illinois, the house is in Florida. Thanks.
Hi Dan and thanks for your comment,
Here’s your first problem. You have a Realtor playing lawyer drafting a document that is wholly wrong. You said the document read in part as follows: “the contract is contingent upon Sellers Lenders (and all lein (sic) holders) approval of this purchase” … unless you have sold the house to the bank this is wrong. The bank HAS ABSOLUTELY NO RIGHT TO APPROVE THE PURCHASE!!
As we have said many, many times. A short sale is just like a conventional sale. The only thing different is that in requesting the payoff we are asking the bank to take less. Payoffs are always requested in ever deal (where the seller has a mortgage)..we just want them to take less.
So the only thing we are asking the bank to do is to approve the reduction in their payoff. Who in their right mind would give the bank power to approve or disapprove the purchase!
However, this particular agent did understand to request a full release AND satisfaction of the mortgage, which is vitally important. Once the satisfaction is in hand AND filed in the County records you CAN NOT be subject to a deficiency judgment.
But you had be absolutely sure that you have a release and satisfaction filed. If you need an attorney with specific knowledge of this subject matter, please let me know and we’ll put you in contact with somebody.
Thanks for the note Barry. I am having my attroney here in Illinois review.
Have you seen Chase allow a short sale where they will loss $60K+/- to someone who is not behind on the note, nor show all the signs of a hardship? The hardship for me is with my partners (divorce and job loss) more so then with me (mortgage in my name, house held in deed within our corporation). The only other hardship I can think of involves the property value going from $292K a couple years ago down to $175K today. Also the fact that rental income has been adversely affected by the economy. If I were Chase, I would not grant me a short sale… In my mind I am everything that is wrong with the process. We (me and my 4 partners) got in over our heads and are looking for cost efficent way out (one that is going to hurt my credit)..
Hi Barry,
You seem to have a lot of knowledge. I realize you are not a lawyer, but maybe you can help. I live in Nevada. My husband purchased a home prior to us being married. It is now between $100K-$140K below value (half the value of the house), depending on who you talk to. I am not on the loan, title, or in any way connected to the house, other than being married to him. Our mortgage company will not help us with a loan modification that will help us enough, and it appears our options are short sale or foreclosure. I have pretty good credit and an income of my own. We do however, share our checking account, making it difficult to show what money is whose. My question is this: can I legally purchase a home for us to live in while short selling his house? Can the new house be considered an asset toward the debt of the old house? Could the money used to purchase the new home be considered money that could have been used to pay the previous mortgage? (It is worth mentioning that the mortgage company would not speak with us until we were behind, so we made the tough decision to not pay our bill.) Please help! Thanks!
Hi Stephanie,
Thanks for the kind words. You are right, I am not an attorney and I am in Florida so please make sure to check with a Nevada attorney on this matter.
That being said, if you are not on the title, and not on the loan then you have no obligation on any note that your husband is the borrower on. So if you can qualify for a mortgage on your own, you most assuredly can make your own purchase. However here is where the problem may come in and where I really can’t say for sure what goes in in Nevada.
That is to say, I don’t know how your State views the marital household. This is a bit tricky. States like Florida have very different laws regarding the homestead of a residence. I would be wrong to offer you advice on the marital home of a couple in Nevada. You definitely want to contact an attorney out there. In the interim, I will email your question to an attorney I know in Nevada and get his response.
Once I have his response I will email you and post it here. Thanks for the great question!