Our friend Doug Farnam with Thomson Conant, PLC provided the following article that looks at how the Arizona courts might interpret a homeowner's obligations regarding the 1099 thier lender will probably send after the short sale process is complete. It is not an easy read, yet the information is valuable. If yoiu need clarification, you can contact the legal team at Thomson Conant directly; Their info in on the short sale legal help page here at Short Sale Phoenix.
1099-C: New Interpretations by AZ Courts
Over the course of the past year or more there has been much discussion in the real estate community of the effect of the issuance of a 1099 by a lender(s) to the IRS following a short sale of a property and reporting the deficiency balances remaining on the loan(s). Many have openly stated that when a lender submits the 1099 to the IRS following the short sale that the lender has reported the deficiency not only as forgiven debt for tax reporting purposes but, has also forgiven the debt for purposes of legal collection against the borrower/homeowners. Many homeowners have relied upon those statements. The exact legal effect of the issuance of a 1099 by a lender on that lender’s right to legally enforce and collect upon the deficiency, however, is not so very clear. The Arizona Court of Appeals has issued an opinion in Amtrust Bank v. Fossett, No. 1 CA-C 08-0840 (Ariz. App. Dec. 15, 2009) in which the court concluded that the effect of the issuance of a 1099 upon a lenders ability to sue a borrower for a loan deficiency has not been decided.
The simple facts of this case are that Fossett had defaulted upon a car loan issued by Amtrust Bank in 2002. The bank repossessed the car and sold it in 2003 leaving a balance due on the loan of $20,000. Two years later, 2005, Amtrust filed a 1099-C with the IRS reporting the sum of $18,000 as “discharged” or a forgiven debt. As a result, Fossett reported the sum of 18,000 as income and included that amount on his income tax returns for that tax year.
