Deeds in Lieu of Foreclosure: Problems and Pitfalls

28 Jul Deeds in Lieu of Foreclosure: Problems and Pitfalls

With foreclosures skyrocketing, many people are looking for ways out of their mortgages. Deeds in lieu of foreclosure are often used to avoid foreclosure. They do avoid foreclosure. But do they really benefit you, the homeowner? In many cases, they can leave you and your credit worse off than filing for bankruptcy.

Here’s the inside scoop on Deeds in Lieu of Foreclosure.A deed in lieu of foreclosure is when you transfer the title to your house back to the lender through a quitclaim deed. This lets the lender obtain title to the property without having to spend the time and go through the expense of a foreclosure. You can’t do this without the lender’s consent, however, and it can often be difficult to get the lender to agree.

This is because if there are second mortgages, tax liens, judgment liens, mechanics’ liens, or other liens or claims against the property, they remain following a deed in lieu, and the lender may have trouble selling the property with these liens outstanding. A foreclosure wipes them out. Many lenders therefore prefer to foreclose and get clean, marketable, title without any unforseen problems.

Even if the lender agrees, a deed in lieu doesn’t eliminate your obligations under the mortgage (unless the lender agrees to do this), it merely transfers title from you to the lender. if you do not negotiate otherwise and your state law allows it, you may remain liable for any deficiency that results from the ultimate sale of the property.

A deed in lieu will seriously damage your credit, typically to the tune of about 200 points (the same as a foreclosure, and the same as a bankruptcy).

Finally, many lenders will issue a 1099-C for any forgiven debt resulting from the deed in lieu. This means that the forgiven debt is considered income, the same as your paycheck. Unless you qualify and file special forms with the IRS and state taxing authorities, you can owe taxes on this forgiven amount. The lender can also agree not to file a 1099-C as part of the negotiations over the deed in lieu.

I have negotiated deeds in lieu for many clients over the years. There are circumstances when they are the best option. But be wary–there are many situations where they are far more beneficial for the lender than they are for you. Check with an experienced lawyer who can properly advise you before doing anything.

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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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