Cosigner is liable when friends lose home

March 21

I am a retiree. My income is from Social Security and a small pension. Ten years ago, I was a cosigner on a mortgage. The homeowners have decided to put the ir home up for a short sale.

I have been advised to talk to a tax attorney. Since my finances are limited, so far I have not sought out any legal help.

I’ve never lived in the dwelling and never received any benefit from the house (in taxes or otherwise). Can you advise me what will be the outcome of the short sale, and what I can do to protect myself?

I do not own a home, or have any assets of value. I do own my car, which is five years old.

When you “help” people buy a home, obtain a student loan, buy a car or obtain a credit card and you cosign with them, you and they are equally responsible when it comes to the duties and obligations required under the documents.

It does not matter if you don’t live in the home, don’t get any benefit from the ownership of the home or wouldn’t get any profits from the sale of the home. What does matter for you is that you are personally responsible for the repayment of the debt owed the lender.

When the person you helped years ago borrowed that money, the bank expected them or you to repay the debt. If they did not repay the debt, the bank could come after you. You were not guaranteeing the debt; you were borrowing the debt with them.

Having said all that, when the people you helped sell their home in a short sale, they will need to get the lender to agree to the terms of the short sale. If the short sale is approved, the approval can come in two forms. The lender could agree to the short sale terms and agree to forgive the repayment of any of the balance of the debt still owing — the deficiency. On the other hand, the lender could agree to the short sale on the condition that the balance of the debt must be repaid over time. While there could be other combinations, these are the two most likely.

If the lender agrees to waive the deficiency, that deficiency is considered a taxable gift from the lender to the person you helped and to you.

However, we assume that, over the years, the bank didn’t issue 1099 mortgage statements to your Social Security number. The person you helped should have received those statements and should have taken any mortgage interest deduction on their federal income tax statements.

We suggest that you make sure that, as part of the short sale process, the people you helped require the lender to issue the 1099-C to them and their Social Security numbers. If this can be arranged, the impact won’t be as hard on you with the short sale.

Let’s say that the deficiency is $100,000 and if they and you both have received 1099 statements in the past attributing the interest paid half to you and half to the other signers, you might now expect that they would treat the 1099-C this way. While lenders may not ordinarily apportion the amounts on their filings, it would be wise for you to find out now, if you don’t already know, how any prior forms were sent out and what Social Security numbers were used.

Given this $100,000 example, if the release of indebtedness is one-half attributed to you, you’ll have an extra $50,000 of income for the year in which the short sale occurs. Given certain assumptions, you might have a bill to pay the IRS of $10,000 to $15,000 on this phantom income. This is what you are trying to avoid.

Finally, your credit score will take a hit. But over time it should improve.

Ilyce R. Glink ’s latest book is “Buy, Close, Move In! Samuel J. Tamkin is a Chicago-based real estate lawyer. If you have questions, you can call Glink’s radio show (800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Glink and Tamkin through the Web site www.thinkglink.com.

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