Private Lenders: Check Before You Foreclose—One Form Could Block Everything

Why a 1099-C could turn into a legal landmine under Civil Code § 2924.13

With over 23 years of real estate litigation and foreclosure experience, one thing is clear: private lenders rarely deal with zombie debt. But the latest prong of California Civil Code § 2924.13 was written for exactly that.

Under the new law, it’s considered an unlawful practice to:

“Conduct or threaten to conduct a foreclosure sale after providing a form to the borrower indicating that the debt had been written off or discharged, including, but not limited to, an IRS Form 1099.”

What does that mean?

In some cases, especially when a borrower hasn’t made payments for an extended period, a lender—or their accountant—may decide to write off the loan and issue a Form 1099-C to reflect a discharge of debt. There’s no fixed rule for when this happens. It depends on the lender’s internal policies and whether the debt is considered uncollectible.

The problem arises when, after issuing that form, someone—maybe a servicer, bookkeeper, or even the lender—restarts foreclosure anyway. That’s what this section is trying to prevent.

This statute was designed to stop the foreclosure of zombie mortgages, not short-term business purpose loans. It’s unlikely to ever come up in private lending—unless someone made a major mistake.

Still, every lender should check the loan file carefully before sending any foreclosure notice. If a 1099-C or discharge form was sent to the borrower, foreclosure may be unlawful under this statute.

In that case, the only possible remedy may be to file a lawsuit in court for judicial foreclosure and declaratory relief, asking the judge to rule that the discharge was issued by mistake and is legally void.

Follow along as we continue breaking down the rest of this new statute.