Posted September 2nd, 2011 under Definitions

What is a Deficiency Judgement?

Tags: Deficiency Judgements, short sale realtors, short sale negotiators, short sale specialists

A deficiency judgement is when the lender refuses to forgive the unpaid portion of a debt and tries to collect on the remaining balance.  The lender can hire an attorney to sue for the remaining debt.  If successful, the lender will obtain a deficiency judgement.

 

While most states allow deficiency judgments, many states hardest hit by the housing crisis, including Arizona and California, are non-recourse states – meaning that a lender may not pursue a borrower for a deficiency judgment on a purchase money mortgage. Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Washington and Wisconsin are non-recourse states. 

 

In those non-recourse states, you will, however, be given a 1099 form after debt forgiveness.  Debt forgiveness is considered taxable income by the IRS and by some state and municipal taxing authorities.  The IRS believes that since you did not have to pay back the entire loan, then you ended up keeping the money, therefore it is income.

 

The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from debt forgiveness on their principal residence. The act applies to all applicable debt forgiven between 2007 and December 2012. It applies up to $2 million for joint filing and $1 million if filing separately.  A qualified tax professional can analyze your specific situation.