I often have consultations with people regarding mortgage and foreclosures, and I discuss bankruptcy with many people as a possible tool to help solve their financial problems. These homeowners are understandable frustrated, and many people facing foreclosure would simply rather give the property back to the bank or mortgage company rather than having them take the property by operation of law.
Being able to give the property back to the lender seems like it would benefit everyone involved.
It will look better on a credit report, the home-owner won’t have to go through the notices and humiliation of a public auction and there won’t be a deficiency. It all seems much better.
But what’s in it for the lender? Well, it will save them the cost of the foreclosure process and a lot of time. In many states, foreclosures can take up to four months to complete. A Judicial Foreclosure can take even longer.
- So why won’t the bank or mortgage company take the expedient way out and simply accept a deed back?
It’s the same result, right? The lender gets the property to sell.
Not quite. For the bank, the advantage of the foreclosure process is that it wipes clean any subsequent lien or loan against the property. In other words, they know they have a property with a clean title that they can market and resell without worry that it has encumberances, liens, judgements, etc. that might cause a problem.
A deed in lieu won’t do that, and the bank could be stuck owing money to a second mortgage or a judgment. If the bank just takes the deed to the property, they take it subject to all other liens on the property. To the bank, it’s worth the money and time to make sure that there isn’t anything lurking out there impairing the property.
When a homeowner finds them self with a home they can’t sell, they can’t give back to the bank, and the bank won’t foreclose, they may find that filing bankruptcy and discharging the debt to the bank helps them take a step away from the home, or at least from owing the home loan. However so long as the property remains in someone’s name, be aware that there may be ongoing duties that need to be maintained, such as property taxes, homeowner’s dues, and municipal obligations.
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Last modified: January 10, 2013