Deed in lieu of foreclosure - You take the house and we're square ... right?

When a debtor is having trouble paying a mortgage and will not be able to meet the obligation of the mortgage, one potential settlement opportunity is a deed in lieu of foreclosure. This is assuming the property is underwater or even at a break-even point without the cost of selling the property. A deed in lieu of foreclosure is when the debtor offers the deed of the property to the mortgage company without the need of going through a lengthy foreclosure proceeding. The mortgage company or bank becomes the property owner.
Common sense would lead people to think that "giving back" the property would give them relief from the entire debt including any penalties and costs. Why else would someone give up their home without a foreclosure ... right? What other benefit would someone receive? Being released from the entire debt is not automatic. The mortgage company could seek the difference between the value of the property and the total amount of the debt. That is the deficient balance. The complete release of all debt in exchange for the deed in lieu (instead) of foreclosure needs to be negotiated and included in the written agreement.

Different trade organizations around the country have been alerting local organizations that many lenders around the country, over the last year, have been sending deed in lieu of foreclosure packages directly to homeowners that have not been including a satisfaction of the deficient balance. A senior attorney with the local legal aid office also reported she has seen mortgage companies take this a step further ... not only are the mortgage companies not satisfying the deficient balance, but some are sending an affirmation of the deficient amount owed to be signed by the homeowners, specifically keeping the debt in place.

If the mortgage company is not offering to forgive any debt over from the value of the property, there may be no benefit to this option. A deed in lieu of foreclosure is treated as a foreclosure by credit bureaus. When the debtors apply for a loan in the future they'll have the same waiting and seasoning period as they would if they had a foreclosure in the past. So staying in the property without paying while the foreclosure process plays out over many months may be a greater benefit to the debtor.

If you are considering a deed in lieu of foreclosure, carefully read the documents. Make sure they specifically state that the deficient balance will be forgiven and that they will not pursue their right to collect that deficient balance. If it is not in the agreement, you cannot count on a complete release from the entire debt.

If you want assistance, legal representation, or just want to know more about Mark Medvesky or Medvesky Law Office, LLC, check out our website at www.medveskylaw.com.

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