Deeds in Lieu of Foreclosure
Definition: A deed in lieu of foreclosure is when the homeowner turns the deed over to the mortgage company to avoid foreclosure. The bank may agree to a deed in lieu of foreclosure and not pursue you for a deficiency.
But it still causes a tax problem. Even if the mortgage company agrees not to pursue the deficiency, IRS rules require the bank to file a 1099-C. This triggers a tax problem unless the person can prove he was insolvent at the time of the 1099-C filing. Just because you and the mortgage company agreed you were not liable does not mean the IRS won’t find you liable.
The Disadvantages of a Deed in Lieu of Foreclosure
You may be able to save yourself and the mortgage company the expense and trouble of foreclosure. But it comes at a cost to you of immediately giving up the home. You are still taxed as income for the amount that was forgiven. Many times this is not an option if there are other mortgages or liens on the property. To convey title, it may require a foreclosure sale to get rid of a second mortgage or judicial liens on the property. Getting the property out of your name does stop code violations and condo or homeowner association fees. It may also still allow a cash for keys option.
A deed in lieu also gives up any chance at the money a sale might produce. If the home sells at a Master Commissioner’s auction for more than the debt against it, the difference belongs to you. Hand over the deed and there is no sale, no surplus, and nothing to claim. If your home has already been sold, see Nick Thompson’s surplus funds page to find out whether the Commissioner is holding money for you.
Why filing an answer and defending a foreclosure is better than a deed in lieu
Many people choose to litigate or stay in the house rent-free until the house is sold. This allows people to save up house payments they would have made. You may need to pay an amount down on a new home or lease with an option to buy. Loan programs set their own waiting periods after a bankruptcy or a foreclosure, and a foreclosure generally keeps you out of the mortgage market longer than a bankruptcy does. We can file an answer to your foreclosure to give you additional time to do a work out with your mortgage company. Or you may need to file a bankruptcy to delay, avoid or stop the foreclosure. Here is a general timeline of the foreclosure process.
What you may expect with the foreclosure process
The foreclosure process normally takes less than six months if no answer is filed. However, if there is an answer, discovery, or bankruptcy filing, it is 18 months to over two years. Even if you file bankruptcy and surrender the property, a foreclosure may be required to get a clear title in order to transfer the ownership to the bank or new buyer.
Never simply walk away from the property because as long as the property is in your name, property taxes will continue to accrue. You remain liable for these property taxes until the transfer of the property. At the time of the foreclosure sale, these taxes are normally paid first before the mortgage.
As long as the property is in your name, you must maintain the property. In fact, building code violations can be issued for not mowing the grass or not keeping up the property. Unfortunately, these code violations can be criminal.
Additionally, be aware that the water bill includes a wastewater portion which continues to accrue even if you turn off the water.
When the property transfers out of your name these maintenance items are no longer your responsibility. Also, when the property transfers, many of the items such as the property taxes are paid.
Resources for Foreclosures
Chapter 11 Business Bankruptcy Information
Can’t Afford Chapter 13 Attorney Bankruptcy Fees?
Mortgage Foreclosures in Louisville, Kentucky
How to Effectively Stop a Foreclosure
Kentucky Deed in Lieu of Foreclosure Law
Please beware of rescue scams claiming to help you stop a Kentucky foreclosure. If you are stuck in a foreclosure see us for help. Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905
