How Deed in Lieu of Foreclosure Works

What are some of the pitfalls for homeowners to be.

A deed lieu is a good mechanism to get rid of a house, particularly when you’re upside down. There will be a certain amount of money that you still owe and the bank is going to look to either chase you for that amount—let’s say you’re $50,000 behind or upside down on the mortgage. When you sit down for the closing on the deed in lieu the bank very well might ask you to sign a promissory note agreeing to pay them that $50,000 over time. The bank also has a choice of forgiving the debt and when they forgive the debt then you have to report it on your tax return as if you had earned that as income. If they go after you on the promissory note then you can consider a bankruptcy to get rid of the obligation but you’ll need to consult with me or somebody like me to make sure bankruptcy is right for you.

With regard to the taxes when you report that amount on your taxes if you had filed the bankruptcy before you did the deed in lieu then the bank cannot forgive the debt and you do not have to report it on your taxes. Now no matter what you do, you will be signing a warranty deed with the bank. And the warranty deed says that you will protect the bank’s interest in this property for any clouds against the title. So if there’s a judgment out there against you, you just agree by signing the deed in lieu to pay that judgment on behalf of the bank.