Deed in Lieu
As a homeowner, once you have made the decision that you either cannot
afford the real estate or that you no longer want to keep the property
and keep servicing the debt, you have a few options.
- Short Sale
- Deed in Lieu
One, you can do nothing. In such case, sooner than later, the mortgage
company will file a foreclosure action against you. Two, you can immediately
consider filing either a
Chapter 7 Liquidation or a
Chapter 13 Reorganization to eliminate or greatly reduce the debt associated with
the home you are surrendering. Three, you can consider a
Short Sale if you have someone willing to put in an offer on your property. Or four,
you can try to negotiate a
Deed in Lieu of foreclosure.
Basically, Deed in Lieu is similar to a voluntary repossession. You are
signing over the deed or "title" to your property and the lender
agrees to cancel the mortgage. In other words, the typical deed in lieu
of foreclosure is a consensual transaction – you have complied with
a long list of requirements placed upon you by the lender, they have evaluated
your facts and circumstances and, after great deliberation, a long time
and a little bit of luck, they agree to take back the real estate instead
of suing you! Typically the lender draws up the Deed in Lieu of Foreclosure
Agreement which must be signed by the grantor / homeowner, witnessed by
two people and notarized. Upon execution, the deed in lieu must then be
delivered to the grantee / lender. The deed is also typically recorded
at the local clerk of court in the public records.
The process, however, isn't as always as clean-cut as it may appear.
For instance, the lender typically reserves the right to seek a
deficiency judgment against you, the borrower / homeowner. Once the lender takes possession,
the property (i.e., REO) will be put up for sale. Unless otherwise stipulated
in the Deed in Lieu of Foreclosure agreement, the lender may come after
you for the unpaid debt.
Generally speaking, there are certain guidelines that must be followed
before the lender will consider the Deed in Lieu. It should be noted prior
to engaging in a consensual deed in lieu that they are not "easy"
and as a general rule, fail more times than they succeed. They are:
- The borrower must have suffered a hardship such as loss of job, sickness,
dissolution of marriage, etc;
- The property is generally an individual's former homestead; the Deed
in Lieu of Foreclosure is generally not for abandoned properties or investment
- The borrower must have exhausted other options / financial resources;
- The property must have been on the market between 90 and 180 days;
- There cannot be any other liens on the property;
The property must be left in clean condition and sometimes the lender requires
an inventory & a statement of condition;
Income Tax Consequences
There are income tax consequences to consider with the Deed in Lieu of
Foreclosure. The IRS often gets involved with Deed in Lieu, because the
deficiency that results from the ultimate sale is typically forgiven.
In such case, this forgiveness is seen as a relief of debt and may be
treated as income. Please consult with your with your accountant or tax
advisor for specific details.
NOTE: On December 20, 2007, President Bush signed the
Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from
higher taxes typically assessed from the forgiveness of indebtedness.
This Act will create a three-year window for homeowners to refinance their
mortgage and pay no taxes on any debt forgiveness that they receive. Under
current law, if the value of your house declines, and your bank or lender
forgives a portion of your mortgage, the tax code treats the amount forgiven
as income that can be taxed.
BENEFIT: This Act will increase the incentive for borrowers and lenders
to work together to refinance loans and allow American families to secure
lower mortgage payments without facing higher taxes.