TAXES
The Bank has taken a loss, also called a Shortfall. The Bank would like to get the Seller to pay the taxes on that loss, and the Bank wants to write off the loss on their income taxes.
To do that, the Bank sends the Seller an IRS Form 1099 for the amount of the loss. Of course, the bank adds its total loss, including fees, etc. Now the bank has created a large tax writeoff.
The IRS considers this Shortfall to be Seller's income, and wants income tax on it.
THIS IS A GOOD THING.
Firstly, it means the Bank has written off the debt and can no longer pursue a Deficiency Judgment against you.
Secondly, the IRS has a Ruling 982, which absolves the seller from paying taxes on a Shortfall when the Seller is "Insolvent."
In a valid Short Sale situation, the Seller is almost always Insolvent.
WHAT TO DO
1. You may get several 1099-C forms. Get them all together and add up the entire amount.
2. Make a list of your assets, things that can be sold for cash, including your home, car, jewelry, etc. Use their Fair Market Value. You might need an appraisal or two.
3, Make a similar list of your abilities, including all debts owed to anyone.
4. If your Liabilities exceed your Assets when you received the Short Sale, Foreclosure, or other cancellation or settlement of debt, you are "Insolvent." and you don't have to report the 1099-C amount as income.
5. DO file the IRS form 982 with your taxes and send the IRS a detailed letter showing your insolvency. You might be tempted to disregard the shortfall on your forms, but your creditors sent those 1099-C forms to the IRS, so you really Do need to file the 982, or expect an IRS letter about it.
THE AMOUNT FORGIVEN is only equal to the amount of Insolvency. For instance, if your total debt is $600,000 including that mortgage and all of the Bank's fees, and you have assets of $400,000 because that is what the house is worth, then you are insolvent by $200,000, which happens to equal the Shortfall. If you have other income, then you'll have to pay taxes on it, per normal.
BOTTOM LINE
You actually Want the bank to send you that 1099-C. You won't have to pay taxes on it, and by sending the 1099-C to you, the bank cannot pursue you for any kind of deficiency judgment.
REMMEBER, We are not tax consultants, financial consultants nor attorneys. For ADVICE you must consult those professionals.
We are Strong and Serious about negotiating with banks. We are perfectly willing to walk away from any deal that would hurt you. We want to get Full Settlement of your Notes, not mere Release of your Liens. We work for you and if you want us to allow a Release without a Settlement so you can have the benefits of a Short Sale, or not, we fully support your decision.
In some cases, a lender can litigate years later for the shortfall. We want you to know the risks and remedies.
Your credit is thoroughly thrashed in Foreclosure or Deed-In-Lieu. A Short Sale isn't even reported on your credit report.
Here is our, and others' best "take" on three important subjects.
DEFICIENCY JUDGMENTS
There are two separate documents, the Title and the Mortgage Note, and they are handled separately.
The Title is what proves you own the property. It has a Lien attached to it. A lien's purpose is to prevent sale of the house without removing that Lien. When the Bank "Releases the Lien" that action makes it possible to sell or foreclose on the home.
The Bank must Release the Lien when you pay off the Note. They may also agree to Release the Lien when you pay less than the amount of the loan. This is the essence of the Short Sale.
Releasing the Lien is not Settling the Note. The Note is merely the Seller's promise to pay some money.
The Seller's Note can be "settled" in several ways, such as "Paid In Full," "Settled For Less than Owed," "Written Off," etc.
Until the Note is settled or written off, the Bank can pursue a Deficiency Judgment by suing the seller.
The Bank will probably win a deficiency judgment, but then must try to get you to pay. That is up to the bank, not the courts. If you refuse to pay, the Bank's remedies are limited.
What the Banks are known to do is to settle those Deficiency Judgments for really small percentages. In this case, it is a full settlement. They may report the settlement "for less than owed" to the credit bureau. You can accept that but you don't want it.
If you settle with the bank, you should negotiate strongly with the bank to pay only if they will "clean up your credit report." This means entering something like "Paid as Agreed," and not "Settled for Less than Owed." Your credit will improve dramatically with the former, and slowly with the latter.
BOTTOM LINE
GET IT IN WRITING before you settle. Verbal words evaporate into thin air as soon as they are uttered. If it is in writing, signed by the bank, it is a contract with you to do what is promised. Otherwise, remember that whether by design or neglect, Banks have poor memories regarding verbal agreements.
COMMENTS
"Starting January 1, 2011, a seller's first trust deed lender cannot obtain a deficiency judgment against the seller after a short sale. Providing written consent to a short sale shall obligate the first trust deed lender to accept the sales proceeds as full payment and discharge of the remaining amount owed on the loan. This law applies to first trust deeds secured by one-to-four residential units, but does not limit the lender from seeking damages for fraud or waste by the borrower. Senate Bill 931. Governor Schwarzenegger vetoed Senate Bill 1178, our sponsored bill, which would have extended California's anti-deficiency protection to refinance loans." California Association of Realtors, Oct 5, 2010.
CREDIT and LIFE EVER AFTER
Foreclosure will cost you 250-350 FICO points. A Deed-In-Lieu of Foreclosure is a voluntary foreclosure. It goes on your credit report for 7-10 years.
You will not get another Fannie Mae Loan for 7 years in either a Deed-In-Lieu or a Foreclosure.
A Short Sale is not reported to the credit bureaus, and it does not affect your score. However, you may have had some late payments which can hurt your score about 25 FICO points apiece, to a maximum of about 75. It varies.
By the way, never let a Bank talk you into missing payments to get a short sale. Missed payments are not necessary!
You can get another Fannie Mae Loan in only 2 years after a Short Sale.
BOTTOM LINE
There are many "Credit Repair" scams. The Chairman of the Federal trade Commission stated that he had never heard of an honest Credit Repair company. We know two and we told him about them after he made that statement.
A month or two after you complete a short sale with us, we will take some of our profit and pay for them to restore your credit rather quickly. It's not cheap, because it is a lot of work, and it requires your cooperation, but not your money. We pay the bill.
Part and parcel of the process is for you to create planned spending that is good and reasonable for you. That plan will help ou align your income to your outgo and end up with stellar credit soon.
The most amazing thing about a spending plan is how much wasted money it identifies and reserves for things you Really Want to do in life.
By the time you can qualify for a new Fannie Mae loan, your credit should be good enough to get a great loan on another home.