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The answer to the question is: the lender has to do one or the other, they can not pursue both. In a short sale whether the bank pursues the homeowner for a deficiency or not depends on the skills of the negotiator working your short sale. The deficiency should be one of the points of contention and there should be a written statement from the lender they will not pursue. In any case if a deficiency is issued at a later time the homeowner can discount (short sale) the judgment. Be sure to check foreclosure laws in your state
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Also, certain banks insist on retaining the deficiency as a debt, like HSBC for example. However each state has different laws on how deficiency judgments need to be handled. Like in Utah they have a statutory time to perfect the lien and then they lose that right. They can continue to try to collect as an unsecured creditor but they cannot make it a lien or a judgment.
If you are insolvent at the time of your short sale (ask an attorney for advice on determining if you fit that description) then you can get rid of a 1099 C in one of two ways, you may file bankruptcy which would of course eliminate that debt, or you can write to the IRS and demonstrate that you are insolvent, and the tax liability will be abated. *Speak with a CPA about all tax advice. This is not meant to be advice for the purposes of preparing federal income taxes nor should it be construed as Legal advice. Always consult the advice of a professional CPA or Attorney regarding all legal or financial matters involving taxes.
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