Deficiency and 1099c question

[speculate]

Once a property is sold in foreclosure sale, does it mean the bank has to file with IRS to write off the loss or the bank can go after the borrower instead for the deficiency or the bank can file for write-off and go after me TOGETHER? In other words, are they mutual exclusive?

[spinner]

It depends what state you are in. Some states like California has a law called "One Action Rule". Where the lender has only one recourse - either foreclose through non-judicial or judicial. If non-judicial then the lender can't come after for deficiency .. can't 'double dip' sorta speak. The lender will send you a cancellation debt document (1099-C).

[onwards]

It depends what state you are in. Some states like California has a law called "One Action Rule". Where the lender has only one recourse - either foreclose through non-judicial or judicial. If non-judicial then the lender can't come after for deficiency .. can't 'double dip' sorta speak. The lender will send you a cancellation debt document (1099-C).

And even more importantly, CA has the FIRST action rule, which means that the lender HAS to go after the property first. Since judicial foreclosures are so rare, in effect it means that for the vast majority of cases, lenders of junior debts do not come after borrowers following a foreclosure they initiated. Of course, if the senior debt holder initiates the action, that changes things, which is why the strategy of paying the first but not the second is so effective in CA; it ends up "effectively converting" most junior housing debts into non-recourse loans.

And yes, this is a gross generalization.