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. There are many exceptions to imputed income discussed in previous blog posts.
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 form1099. 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.
Originally, I thought the same way you do on this subject. However, I have been hearing that many well informed attorneys are arguing/pleading, with some success, that the issuance of a 1099 is an affirmative defense to a deficiency claim. I recently attended a Fund seminar where the presenter also made the same assertion i.e. that the issuance of a 1099 is an affirmative defense to a deficiency claim.
In Connecticut there is case law that under the UCC the 1099-C form is a "signed writing" that cancels the debt.
FRANKLIN CREDIT MANAGEMENT CORPORATION v. THOMAS J. NICHOLAS ET AL.
http://www.jud.ct.gov/external/supapp/Cases/AROap/AP73/73ap59.pdf
http://www.ryancareycpa.com/Papers/Tickmarks Fall 2006 Article - Carey.pdf
I've also seen case law that supports that they were not waiving their right to collect. Error on the side of telling your client the could!