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Deed in Lieu

A Deed in Lieu is a voluntary repossession. You transfer ownership of the property and the lender agrees to cancel the mortgage of record. In other words, the deed in lieu of foreclosure is a consensual transaction. You comply with a list of lender requirements, the lender has evaluated your facts and circumstances and after deliberation, time and a bit of luck, the lender agrees to take back the real estate instead of suing you.

Although the process seems simple, it isn’t as always as clean-cut as it may appear. First, a lender may reserve the right to seek a deficiency judgment against you. Or, a lender may accept a Deed in Lieu with an accompanying payment from you.  Some lenders may accept a promissory note for the deficiency.  Second, lenders are often reluctant to accept a Deed in Lieu because the Deed in Lieu does not “cleanse” title as a foreclosure would.  Therefore in accepting a Deed in Lieu, a lender accepts title with all junior liens and with all faults (i.e. HOA liens, 2nd mortgages, etc).  Finally, there are usually certain tax consequences.

A Deed-in-Lieu is generally looked upon the same way as a foreclosure is very damaging to your credit. It may limit your ability to get credit in the future.

You may have significant tax consequences as a result of a Deed in Lieu because in the event the lender “writes off” the deficiency and issues you a 1099C, this is seen as debt forgiveness by the IRS and may be treated as income. Please consult with your tax advisor for specific details regarding your situation.


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