Foreclosure And Deficiency Judgments

For accounting or legal considerations, the lender may choose to report the loan deficiency for the guarantor on Form 1099 to the IRS. This gives the former homeowner or loan guarantor a "phantom income" equal to the amount of the loan deficiency and will require he pay income taxes on this amount. In this case the cost of the guarantor's foreclosure will be the amount of income taxes he pays the IRS instead of the entire amount of the deficiency judgment plus additional interest and expenses. This can be a substantial savings to the guarantor and the lender benefits because of a better impact to their financial statement. Usually the lender will issue a 1099 unless they feel there was fraud involved with the original loan.

If a lender accepts a deed in lieu of foreclosure and they make a profit from its sale, they will retain the profit. However, if they lose money, they may be able to issue a 1099 depending on the terms of the original loan agreement and the Acceptance Agreement. It is always wise to have an attorney review any agreement before you sign it to preserve your financial interests. Have the terms of your loan agreement reviewed and any agreements a lender offers you.Carefully weigh your rights and options when you make a decision to allow your home to be lost as there are solutions besides foreclosure and deed transfer to the lender.