Deed in Lieu

If refinancing, a loan modification or a short sale is not possible for you, a deed in lieu of foreclosure could help you avoid foreclosure. The deed in lieu is less costly for the lender than a foreclosure, so the lender may be agreeable to accepting the deed in lieu. If you have a second and/or third mortgage on your home, you probably cannot do a deed in lieu, because the other lien holders will get nothing from the deal and have no incentive to agree to it.

With a deed in lieu, you simply give the property back to the bank and move out. In most cases, the lender will agree to forgive the balance on the loan if the property is worth less than you owe.

Another advantage of a deed in lieu is that it won’t harm your credit as much as a foreclosure. It is easier than a short sale because you don’t have to go through the trouble of finding a buyer for your house.

One of the disadvantages of the deed in lieu is that it may have negative tax consequences for you if the lender forgives the balance of the loan. The IRS may consider the forgiven amount as taxable income and you will have to pay income taxes on it. Consult a tax attorney or accountant to determine if you are exempt.

Legal Editors: Thomas Tilona and K. Scott Kohanowski, City Bar Justice Center Foreclosure Prevention Project, December, 2017

Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.

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