Can a Lender Still Collect After a Cancellation of Debt and 1099 Was Given?
Full Question:
Answer:
In California, "anti-deficiency" laws apply to certain protected borrowers. Under such laws, lenders will be barred, generally, from pursuing the borrowers personally for any excess amount of the secured debt left unpaid after a foreclosure sale (the "deficiency").
Section 580b specifically prohibits recovery of a deficiency from a borrower, who obtainedthe loan in order to purchase real property as a residence for the debtor, when the property contains one-to-four units and the property was used to secure the purchase loan (Home buyers who later refinance their home loans may risk losing their "anti-deficiency" protection).
Section 580b also bars a deficiency as to sellers, who sold the secured property to the borrower, and who "carried back" a loan as part of the purchase price, as "seller financing".
Code of Civil Procedure Section 580d further prohibits deficiency judgments from otherwise unprotected borrowers, when a lender has foreclosed upon the secured property by a private, "power-of-sale" foreclosure proceeding, pursuant to the terms of the deed of trust. If the lender wishes to obtain a deficiency judgment against an unprotected borrower for the unpaid loan balance, Section 580d requires the lender to initiate a judicial foreclosure according to the statute.
There are exceptions. For example, an otherwise protected borrower might still be subject to further claims by the lender after foreclosure if the borrower induced the lender into issuing the loan by use of fraud, or where the borrower has committed "bad faith" waste as to the secured property (i.e reckless, intentional, or malicious failure to physically maintain the property).
The answer depends in part on whether or not federal law required the lender to issue the 1099 or not. A lender may issue the form even though it has not actually cancelled the debt.
For further discussion, please see:
http://www.cofad1.state.az.us/opinionfiles/CV/CV080840.pdf
http://ann-lawyer.com/component/content/article/51.html
