Hello again. Any time a creditor forgives a debt, there is a good chance that they'll issue a 1099. Whether the forgiven debt has to be realized as income will depend on whether the debt was a qualifying debt under the Mortgage Debt Forgiveness Act and that's why you should consult with a CPA before you make a decision. Even if you don't have to pay taxes on the forgiven debt under federal tax law, you may still have to pay taxes under your state's tax laws (if your state has income tax). Again, based on the information that you provided, it looks like there would be enough money to pay the first mortgage in full and you'd only short sale on the second. Good luck.

Thanks so much for the information. The house was our primary residence, and we've now moved to KS. So I'm not sure how a deficiency would be handled, if we would receive a 1099 or not. I haven't talked to the 2nd mortgage holder yet. The last contract we had on the house (2 of 2) was for $152K and the house appraised for $155K. BUT -- it needs a major repair, and so it will have to be fixed or sold for less as-is.

If the property is upside down, the 2nd lien holder will not receive any money. They get wiped out. This is why 2nd mortgages are usually higher in rate. They are also higher in risk.

Hello Angela. In your circumstance, it looks like there might be enough money to pay the senior lien holder in full in which case you'd only negotiate the short sale with the junior lien holder and it looks like they'd not really lose that much money compared to many other short sales that we see out there these days. Many lenders will agree to the short sale in exchange for the borrower signing an unsecured personal note payable over 20 years with 0% interest, which has the benefit of you not receiving a 1099 because there's really no debt forgiveness and it not affecting your credit score as much as a short sale with debt foregiveness or a foreclosure would. Typically, you have to show a hardship and many lenders will not consider a short sale unless you are behind with your payments. I would contact the lender and see what their short sale requirements are (every lender has slightly different requirements). When we first started seeing a lot of short sales, the lenders seemed to be stricter with their short sale requirements. Now, I see more short sales being approved that would not have been approved a year ago. I am not clear on whether this home was ever your primary residence or whether this is an investment property and frankly, I am not really sure whether it makes a lot of difference these days as far as the lenders are concerned. They look more and more at the bottome line and what they have to gain from denying the short sale request. In your case, the second would most likely get nothing or very little if the home goes into foreclosure and they may very well be very willing to work with you on a short sale if it's financially the better option for them. I recently closed a short sale on an investment property with a very weak hardship letter and the short sale negotiator even commented that the hardship letter was weak but not necessarily a deal breaker (in that transaction, the first lost some $60,000 and the second settled for $1,500 out of the over $60,000 that was owed). I would highly recommend that you speak to a CPA who is familiar with short sale tax issue before you make a decision. Good luck to you.

Angela
You need to talk with a Realtor that understands short sales.
In order to get lenders to agree to a short sale you need to be able to prove hardship. Generally that means that you are broke and cannot pay your bills.
However, based on what you posted, it may be that you will be able have the lenders give you a promissory note for the difference. Generally the note is unsecured and interest free.

Again, talk with a Realtor to look at your options. And read my article.

In order to do a short sale both lenders must agree to do it ,I am not a tax expert or a lawyer but they may send you a 1099 on any amount not collected and in most cases the second gets1,000- 3000. also they may attatch a lien on any other assets you may own., List the home for sale at market price most lenders will allow a reasonable marketing time for you to try to sell the home .They will not stop the foreclosure it will continue ,When did you purchase the home? and When did you get an appraisal for the$150 ,000 ? please email me I also am a Home Retention Consultant and can contact lenders at a higher point of contact. Since the home is not your primary residence is it currently rented?
The lender will reqiure 2 years of signed tax returns,2 most recent pay stubs with ytd,Financial Statements,2 months of Bank statements with logo,and a hardship letter all items are required documents missing are incomplete packages and are not generally looked at they file them .

I dont have alot of experience with short sales but I do know that on a short sale the second mortage holder is the real short man out. Usually they get nothing!