Many people in the world of mortgage debt and bankruptcy have heard of short-selling their homes. This involves a creditor agreeing to the sale of one’s property even if the sale won’t cover the remaining balance of the mortgage.
There’s another mechanism of avoiding foreclosure called a “deed in lieu of foreclosure.” This involves the homeowner transferring the deed to the property to the creditor, and in exchange the creditor cancels the mortgage agreement. After the property is resold, the creditor may seek a deficiency from the former owner if the sale price is below the total on the mortgage.
Here are the five requirements for a successful deed in lieu agreement in most cases:
(1) The homeowner must have had the residence on the market for a certain time period (often 90 days).
(2) There can be no liens on the property.
(3) The bank cannot already be foreclosing on the property.
(4) Both parties must enter into the agreement voluntarily and in good faith.
(5) The deed in lieu agreement must equal the fair market value of the property.
A deed in lieu agreement benefits both parties in a few specific ways.
First the borrower no longer must pay on the defaulted loan.
Second, the borrower does not suffer the adverse effects of foreclosure, including the hit to the borrower’s credit score.
Third, the bank will likely offer or agree to more favorable terms than it would if it initiated foreclosure proceedings. The bank benefits by repossessing the property more quickly and efficiently than it would via foreclosure. Because the borrower is less likely to commit acts of vandalism or revenge—such as tearing out the copper pipes and selling them for scrap—the bank may prefer a deed in lieu agreement.
Homeowners considering a deed in lieu of foreclosure agreement rather than a short sale must read the agreement carefully before signing, paying particular attention to how the bank wishes to handle the deficiency balance. In most cases, the bank prefers more money to less, so it will pursue borrowers for the deficiency balance after it sells the home. Even if it does agree to forgive the balance, doing so counts as income for the former homeowner, which is subject to income tax. The creditor must file a 1099C form telling the IRS that it forgave the loan if the deficiency is greater than $600. However, the Mortgage Forgiveness Debt Relief Act of 2007 eases the income tax burden on forgiven loans.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation by calling 702-880-5554.