Countering the threat of a deficiency judgment

In a Short Sale, in order to be in compliance with the IRS, the lender must send a Form 1099C (Cancellation of Debt) to the borrower for the difference of what was owed and what the house sold for. If, by law, they have the send a Form 1099C, then how can there be a deficiency judgment if it’s a cancellation of debt? Both can’t happen at the same time. Most loss mitigation reps will no idea how to counter this question! Don’t let them threaten you and/or your client with a deficiency judgment!

Michael Spickes

[b]We are stating that the 1099C and the deficiency judgment are two separate issues. Yes, the difference owed is considered taxable income, not tax owed. We have a CPA on board our team with 12 years of public accounting experience and have verified that in order to be in compliance with the IRS, lenders must submit a 1099C (Cancellation of Debt) to the borrower who did the short sale. Now, we have found that maybe 50% of the lenders actually do this. More power to them.

Since the lender is required by the IRS to send the 1099C form to the ex-borrower, this overrides any other ability to recover any of the difference owed (i.e. a deficiency judgment) because the 1099C is reflecting a “forgiveness of debt”. If the debt is forgiven, then the lender cannot come after the borrower with a deficiency judgment. Make sense? This is a great comeback to have when a loss mitigation rep threatens you and your client with a deficiency judgment. Loss mitigation reps won’t quite know how to respond.

Michael Spickes[/b]

Not sure you have that right…the lender typically sends out a 1099 to the borrower to pay taxes on the difference in debt cancelled. Ex: House is $100,000 and lender took SS of $60K so lender will send out 1099 to borrower to pay taxes on $40K…not to pay the $40,000.

The deficiencey judgement is a different thing and that is where the lender goes after the borrower for the $40K that the lender took a loss on. In most cases, the lender will not file a deficiency judgement because it pretty much pointless to go after someone who has no money. They wouldn’t have taken a SS if the borrower did have money.

I hope this makes sense. Sheila

^ I agree.

For more info on the 1099 see this thread:,32466.0.html