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Richard
Richard, Lawyer
Category: Real Estate Law
Satisfied Customers: 46137
Experience:  32 years of experience as lawyer in Texas. I'm also a Real Estate developer.
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We have sold our house through a short sale in December of

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We have sold our house through a short sale in December of 2012 in Oakland, California. The home loan was with the Bank of America (BofA), which agreed to accept a short sale for the sale price of $160,000.00. The value of the original loan was $470,000.00. Previously, in October of 2011, we received the short sale acceptance letter from BofA stating:
“Upon receipt of the agreed amount, Bank of America, N.A. and /or its investors will waive the remaining balance due on the above-referenced loan and release the borrower from further obligation therein, and waive all rights to pursue further judgment or deficiency. Bank of America, N.A. will report the debt as “settled for less than the amount owed” and issue a 1099 for the remaining balance.”
In May of 2013 the finally received the “Substitution of Trustee and Full Reconveyance” letter stating:
“The debt secured by the Deed of Trust described above has been partially paid. Therefore, this reconveyance does not constitute a satisfaction of the debt. Absent a separate agreement in writing providing otherwise, the debt remains in full force and effect. This reconveyance serves only to release the lien of the Deed of Trust upon the property described therein”
After receiving this reconveyence letter, we are not concerned that a collection agency will try in the future to collect the deficiency balance. Please advise.
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Richard replied 1 year ago.

RE Att. & Developer :

Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

RE Att. & Developer :

Good evening. Was this your principal residence?

Customer:

A rental apartment.

Customer:

Sorry.

Customer:

Yes, it was

RE Att. & Developer :

Thanks...just to clarify...this was your principal residence and not a rental property? Are you wondering whether you will be subject to tax based on the 1099 for the amount of the debt over the value of the property?

Customer:

This was my principal residence. No, we already paid the taxes based on the 1099.

RE Att. & Developer :

And, one other thing....was this your original loan from which you were released?

Customer:

yes

RE Att. & Developer :

Thanks. You need not worry about tax. You will not be taxed on the difference.


Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions. The law has now been extended through the end of December 2013. The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details. Furthermore, it's not likely you will even get a 1099 if this was the loan you obtained to purchase the property because California is a non-deficiency state. Under CA’s statute, deficiency judgments cannot be entered for foreclosures by private sale or on purchase money mortgages. A lender cannot get a deficiency judgment if it forecloses by private sale or if the underlying loan was a purchase-money loan. Thus, because it would be non-recourse note for which you never had any personal liability for any shortfall, there can be no forgiveness. ;)

RE Att. & Developer :

Thank you so much for allowing me to help you with your questions. I have done my best to provide information which will be helpful to you. If I have not fully addressed your questions or if you have any follow up questions, or if I have misinterpreted your questions in any way, please do not rate me yet, but simply ask a follow up question without rating so I can provide you with a fully satisfactory answer. If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service with 3, 4, or 5 faces/stars so I can receive credit for helping you today. I thank you in advance for taking the time to provide me a positive rating!

Customer:

Like I said, I'm not worried about the taxes. Could you please answer my question. Can the bank come after us for the difference between the short sale price and the loan amount?

RE Att. & Developer :

I'm so sorry, I misunderstood you. The answer to that is no. You have absolutely no liability for the difference.

RE Att. & Developer :

One, because they agreed to waive any right to pursue you. And, two, because they never had that right to start with because of the California non-deficiency statute.

Customer:

How about the language in the reconveyance letter?


“The debt secured by the Deed of Trust described above has been partially paid. Therefore, this reconveyance does not constitute a satisfaction of the debt. Absent a separate agreement in writing providing otherwise, the debt remains in full force and effect. This reconveyance serves only to release the lien of the Deed of Trust upon the property described therein”

RE Att. & Developer :

This language waives the shortfall: Upon receipt of the agreed amount, Bank of America, N.A. and /or its investors will waive the remaining balance due on the above-referenced loan and release the borrower from further obligation therein, and waive all rights to pursue further judgment or deficiency. Also, as I said, California is a non-deficiency state so you would have no recourse in any event.

Customer:

But why is not the same or similar language repeated in the reconveyance letter? The letter does not acknowledge the existance of the short sale acceptance letter but it states: "Absent a separate agreement in writing providing otherwise, the debt remains in full force and effect."

RE Att. & Developer :

It should have been, but it won't make any difference....i) they would be estopped from trying to pursue it when they had already given you the previous letter; and ii) again, since CA is a non-deficiency state, you have no personal liability in any event for the shortfall. The letter is a typical form letter that gets sent out by BofA across the U.S. and whoever sent it most likely overlooked the fact that you are in CA, which unlike most states, is a non-recourse state.

Customer:

Just to clarify that the reconveyance letter was recorded in the county and the short sale acceptance letter was sent to me only by email. In your opinion, should I stop pursuing this matter, or should I ask (if possible) BofA to change the reconveyance letter? And also, have you come across a case like this before?

RE Att. & Developer :

You don't have to worry about this further...they have no legal right to pursue it. There really is no reason to try to work through the layers of people of BofA to get the letter changed when the end result will be the same. I see this all the time, especially with national banks because they have these forms they use for all states and send them out to all states...even when not really appropriate in the few non-recourse states.

Customer:

Ok, Thank you.

RE Att. & Developer :

You're very welcome...it's been my pleasure to help!

Richard, Lawyer
Category: Real Estate Law
Satisfied Customers: 46137
Experience: 32 years of experience as lawyer in Texas. I'm also a Real Estate developer.
Richard and other Real Estate Law Specialists are ready to help you
Expert:  Richard replied 1 year ago.
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