Let's talk about a topic near and dear to my heart - short sales. Yes, this "dance with the devil" as I like to call them is full of twists and turns, highs and lows, yes's and no's...some may liken it to marriage ;-)

I digress. Short sales have become a common occurrence, with some areas seeing just a few and other places seeing 30%, 50%, and even 75% of homes in a short sale status. To recap for those not paying attention, short sales are when the home's fair market value is EXCEEDED by the mortgaged amount, leading to a deficiency or "short" on the mortgage. To head off these homes going back to banks as foreclosures, banks will accept less than what is owed while sometimes sticking the owner with the difference...and sometimes not.

That is what we will discuss today:

the relationship between a 1099C and a deficiency judgment!

A deficiency judgment (DJ) CAN be pursued on the amount of the mortgage "forgiven" by the lender. EXAMPLE: Joe has a $150k mortgage and short sells it, with bank approval, to Jan for $100k. That leaves a $50,000 DEFICIENT AMOUNT.

In foreclosure or a short sale, lenders are allowed to, but rarely do, pursue deficiency judgments against the former owners. The reasons lenders normally DON'T file for deficiency judgments are:

1) Practically impossible to collect as most owners foreclosed on don't have much money
2) Cost of litigation to achieve the deficiency judgment is costly
3) DJ's can be discharged in bankruptcy as unsecured debts.

Banks will routinely issue 1099c's instead. When issuing a 1099C (cancellation of debt), banks take the paper loss and pass it on to the former owner as "income" in the eyes of the IRS. Pls consult an accountant for what to do with a 1099c.

If you are issued a 1099C, one would think that the deficient amount is history and a DJ is out of the question, as the debt is being transferred as "income" to the homeowner. A reasonable assumption. However, according to Carolyn Secor, a Clearwater-based attorney who specializes in foreclosure defense and bankruptcy, the 2 are apples and oranges. A DJ is a civil litigation action and a 1099C is simply an IRS function. The 2, when held at arms length, are not truly related. HENCE, ONE CANNOT ASSUME THAT THE ISSUANCE OF A 1099C WILL PREVENT A DJ.

Short sale sellers will find the language in their approval letter. Banks will state they are releasing the lien so the sale will go through but ALSO accepting the proceeds as payment in full. Some banks go as far as telling you how it will be recorded with the credit bureaus. Unless you see the above language, or "satisfaction of mortgage", or something similar, do NOT assume you are being released from the note (mortgage).

Unfortunately, sellers are taking a chance when they are told they will receive a 1099C at the end of the year AND they don't see any written language releasing them from the obligations of the note. And sometimes that's all the sellers get. Only that seller can determine whether its worth completing the short sale and dealing with future ramifications.