Can A Mortgage Lender Seek Deficiency Judgment After Issuing A Form 1099?

 

Many people do not understand the significance of tax form 1099 in the foreclosure context. A 1099 is an IRS reporting form indicating that the lender has written off a mortgage and is declaring a tax loss. The borrower may have to declare the bank’s loss as imputed income.

If a lender forgives a borrower’s personal liability on a mortgage the lender is supposed to issue a form 1099. Liability waiver always results in the issuance of a Form 1099. But is the opposite true? Does a form 1099 always result in a release of borrower liability? A reader submitted by email the following question:

If you receive a 1099 for imputed income from a lender, can the lender also seek a deficiency judgment?

The answer is yes; the lender can pursue a deficiency claim even after issuing the borrower and filing a 1099. A form 1099 is not a legal release of the borrower’s liability. After issuing a form 1099 the mortgage lender can still legally sue for a deficiency claim, or the lender could sell the claim to a third-party. The lender takes a tax loss when it issues a 1099 to the borrower. If the lender subsequently sues the borrower or sells the claim the lender would recognize taxable income in the amount of money it collects from the borrower or the amount it receives from a third party when it sells the deficiency claim.

A 1099 may indicate that the lender is not pursuing personal liability against the mortgage borrower, but the form 1099 is not a legal defense against a subsequent deficiency claim.