If the lender issued you a 1099 for their loss, then they can not seek any collection actives. The 1099 is issued stating to the IRS that they have forgiven the debt. How can you collect money on a debt that is forgiven? They can do one or the other not both. They are "double dipping". I am not an attorney but you might consider consulting one. Also take a look at the short sale approval letter. What does it say? Does it say they will accept the money and release the loan, or does it specifically say they will release the lien only not the debt?

@ Kimberly - California is a non recourse state, so they can't pursue the defeciency on the first whether they reserve the right or not.

The 2nd is a different story, but it is still probably easier to deal with a collector who buys the debt for pennies on the dollar and settle it a few years down the road and still salvage your credit.

Short Sales have really become a problem for me as an agent just because of this! I recently had a SS listing and got a final approval for both the 1st and 2nd from B of A..however, the letter explicitly states that B of A reserves the right to pursue a deficiency judgement..for BOTH liens! My Seller cancelled the deal and decided to let it foreclose. The Banks MUST change this or they are going to be overwhelmed once again with REO's. But, until they do, Seller beware of those Shorts..in CA, they can EITHER 1099 or pursue a deficiency, not both. Unfortunately, it is not stated in most of the acceptance letters so it's a crap shoot..

Devo,

If the lenders agreed in the approval letter to 1099 you, they should not be able to pursue you for a deficiency. It really all comes back to the approval letter that they issued you. That is what an attorney is going to want to review.

As Rebecca says, you'll want to read through it thoroughly to be sure they did in fact release you from liability. If they didn't explicitly express that they reserved the right to pursue the deficiency, you may have a case.

Rebecca is right, they can release their right to the property, but can file a lien against your name in a short sale..you could talk to a cpa or a real estate attorney to see if there are any recourses out there for you..good luck!

Devo,
You may want to go back and read the approval letter from the 2nd mortgage more carefully. I often see that they agree to release their claim on the property for the amount offered to them in the short sale, HOWEVER, they are not always releasing you from the liability of the deficiency. The only difference is that it has gone from a secured loan to an unsecured loan.
Legally, I believe that they have up to 5 years to go after you on the deficiency. Whether or not they take action to collect the debt is up to the lender. This decision is often based upon what they feel your ability to pay it back.
Unfortunately, this is a risk that goes along with doing a short sale.
I hope that this answer helps you. I would recommend double checking your approval letter before consulting an attorney.
Best wishes,
Rebecca.