Deed in Lieu of Foreclosure
Homeowners in Los Angeles who find themselves unable to keep up with their mortgage payments may consider a deed in lieu of foreclosure transaction, which is one possible alternative to going through a long, drawn-out foreclosure process. Not all lenders are willing to accept a deed in lieu of foreclosure though, which is why it helps to have a knowledgeable Los Angeles foreclosure defense attorney on your side who can ensure that you understand your rights as a homeowner and help you navigate the process of avoiding foreclosure and pursuing a deed in lieu of foreclosure. If you are falling behind on your mortgage payments and the lender has denied your request for a repayment plan, loan modification or forbearance, or if these options don’t work for you, you may be able to avoid foreclosure by completing a deed in lieu of foreclosure. Contact our seasoned Los Angeles foreclosure defense attorneys at Resnik Hayes Moradi LLP today to discuss the various ways in which you can stop the foreclosure process.
Trusted Los Angeles Foreclosure Defense Attorneys
Most people know what a foreclosure or short sale is, but the transaction known as a deed in lieu of foreclosure is generally less familiar. As an alternative to foreclosure, a deed in lieu of foreclosure could be your best option for eliminating your mortgage debt, if you don’t qualify for a loan modification or forbearance and you don’t want to attempt a short sale. No matter what financial situation you are facing, it is always a good idea to contact the lender if you are considering a deed in lieu of foreclosure, to find out if the lender is willing to work with you in order to avoid foreclosure proceedings, and your attorney as well, to ensure that you understand the tax, credit and financial implications of a deed in lieu of foreclosure transaction. Dealing with mortgage debt and coming up with the best solution for avoiding foreclosure may seem like a daunting task, but with sound legal advice from a trusted Los Angeles foreclosure and debt relief attorney, you can find your way through this financial crisis. Retaining an experienced lawyer to represent your rights and best interests and help you understand the benefits and tradeoffs of a deed in lieu of foreclosure is the best decision you can make when facing foreclosure in Los Angeles.
What is a Deed in Lieu of Foreclosure?
Many homeowners who can’t keep up with their mortgage payments choose to sell their home to pay off the balance due on the mortgage loan, but today, many homes in Southern California are underwater, meaning they are worth less than the amount owed on the loan. In this case, selling the home won’t produce enough funds to pay off the outstanding debt in full, which puts the homeowner in a difficult position financially, with foreclosure as the only seemingly plausible solution. On the contrary, homeowners in Los Angeles who can’t sell their home at a price that will satisfy the remainder of the debt they own on their mortgage loan may be able to avoid the embarrassment, inconvenience and credit consequences associated with a public foreclosure sale by transferring the deed to their property to the lender, a process known as deed in lieu of foreclosure (DIL).
DIL as an Alternative to Foreclosure
Proposing a deed in lieu of foreclosure transaction is one-way homeowners in Los Angeles can stop foreclosure. A deed in lieu of foreclosure is a transaction in which a homeowner voluntarily transfers ownership of the property used to secure the mortgage loan to the lender, turning over the title to a property that would otherwise be foreclosed on, in return for being released from any liability for paying back the remainder of the mortgage loan, thereby walking away from the home and the mortgage obligation altogether.
Understanding the DIL Process
If you propose a deed in lieu of foreclosure in Los Angeles, the lender may require that you first attempt to sell the property before agreeing to a DIL, and there are some situations in which a lender will reject a deed in lieu of foreclosure proposal altogether, particularly if there is a second mortgage on the property or home equity loan. A deed in lieu of foreclosure isn’t always an option for homeowners who have fallen behind on mortgage payments, and even when it is, the process can be complicated and confusing, which is why we always recommend first consulting an experienced foreclosure defense attorney who can walk you through the pros and cons of a DIL transaction and determine whether it is the best choice for your particular situation.
Benefits of Deed in Lieu of Foreclosure
Compared to foreclosure, there are several benefits to a deed in lieu of foreclosure transaction, the most important benefits being the protection from a possible deficiency judgment that a DIL provides and the reduced credit rating damage. There are other significant differences between foreclosure and deed in lieu of foreclosure, including the fact that with a DIL, you may be able to qualify for a mortgage and purchase real estate sooner than you would following a full-blown foreclosure. When it comes to deciding whether a deed in lieu of foreclosure is right for you as an alternative to foreclosure in Los Angeles, there are a number of factors you will have to consider, including the following:
- Your income
- Your credit score
- Your mortgage payment
- The amount you owe on your mortgage loan
- Other debts you owe
- The lender’s willingness to work with you
- Other foreclosure alternatives
- Whether the foreclosure is imminent
What Deed in Lieu Will Mean for Your Income Taxes
It is also important to consider what a DIL transaction will mean for your income taxes when weighing the pros and cons of transferring the title to your property and being released from your mortgage loan. Typically, the IRS considers any debt that is forgiven or canceled by a lender part of an individual’s income and subject to federal taxes. Therefore, before the Mortgage Forgiveness Debt Relief Act of 2007 was passed, homeowners who had mortgage debt canceled by a lender were required to pay federal taxes on the amount that was canceled. Under the Mortgage Forgiveness Debt Relief Act, however, homeowners who lost their homes to foreclosure or a short sale, or those who renegotiated the terms of their mortgage loan, were permitted to exclude from their taxes up to $2 million of canceled mortgage debt for a principal residence. This tax break for canceled mortgage debt was extended numerous times and applied to debt discharged before January 2018 and to debt discharged in 2018 if a written agreement was entered into in 2017. As of 2019, there has been no indication as to whether the Mortgage Forgiveness Debt Relief Act will be extended again. California also has a law in place known as the Mortgage Debt Tax Forgiveness Act of 2018, which excludes the discharge of mortgage debt from a homeowner’s income for the purposes of taxes.
Deficiency Judgments in California
One of the most important factors to consider when determining whether a deed in lieu of foreclosure is right for you is whether you will be subject to a deficiency judgment following the DIL transaction. In terms of a mortgage loan, “deficiency” represents the unpaid balance on the loan following a foreclosure sale, and in some cases, if the foreclosure sale did not produce enough funds to cover the outstanding debt on the loan, the lender can ask the court to issue a judgment against the borrower for the unpaid balance on the loan. A short sale or deed in lieu of foreclosure can also result in a deficiency, which would be the difference between the amount owed on the loan and the fair market value of the property.
In the state of California, lenders are prohibited from obtaining a deficiency judgment following a short sale on most residential properties, as are junior lien holders, if they agreed to the short sale. And while California’s deficiency judgment law does not explicitly apply to DILs, most mortgage lenders who accept a deed in lieu of foreclosure in Los Angeles will waive their right to pursue future payment from the borrower for any deficiency. This means, in exchange for the DIL transaction, the borrower is released from all obligations and liability under the mortgage agreement.
In some cases, a lender will choose to pursue a deficiency judgment against a borrower following a DIL transaction, but only in about 5% of cases do lenders actually pursue such judgments against borrowers. In order to avoid a deficiency judgment with a deed in lieu transaction, you should make sure that your agreement with the lender states that the transaction satisfies the mortgage debt in full. Otherwise, the lender may sue you to obtain a deficiency judgment after the deed in lieu transaction is completed. If a lender accepts your deed in lieu of foreclosure proposal but won’t forego its right to pursue future deficiency liability, you might consider a short sale instead.
How Bankruptcy Can Help
One of the greatest benefits of filing for bankruptcy is the automatic stay that goes into effect immediately upon filing a bankruptcy petition. If you are behind on your mortgage payments and the risk of foreclosure is looming, you have the option of filing for bankruptcy, which puts an immediate stop to any debt collection efforts or foreclosure proceedings. If you are facing foreclosure in Los Angeles, you can give yourself some extra time to find an alternative to foreclosure by filing for bankruptcy and taking advantage of the automatic stay.
Chapter 7 Bankruptcy
If you have few assets and a great deal of debt, filing for Chapter 7 liquidation bankruptcy can help you eliminate your unsecured debts and free up some money to cover any past-due mortgage payments, so you can keep your house.
Chapter 13 Bankruptcy
If you want to keep your home and you have enough regular income to repay all or a portion of your debt over time, filing for Chapter 13 bankruptcy can help you restructure your debts, eliminate credit card debt, medical bills and other dischargeable debt, and catch up on past-due payments, including your mortgage payments.
How a DIL Can Affect Your Credit
You should be aware that a deed in lieu of foreclosure can affect your credit score, but the impact won’t be nearly as significant as with a foreclosure or bankruptcy filing. When you go through the foreclosure process, a record of the foreclosure remains on your credit report for seven years, which can affect your credit rating and keep you from qualifying for a subsequent mortgage for years. With a deed in lieu of foreclosure, it may take several years for your credit to fully recover, but you may be able to qualify for a new home loan in as little as two years, or possibly as soon as 12 months in certain cases. Even though bankruptcy typically damages your credit score more than a DIL, filing for bankruptcy is still a good alternative to foreclosure for many homeowners, particularly those who have other debts they can have discharged or reduced through the bankruptcy process.
Contact an Experienced DIL Attorney Today
Homeowners in Southern California who have found themselves burdened by debilitating debt and are no longer able to keep up with their mortgage payments may feel as though foreclosure is a foregone conclusion, but there are a number of options for avoiding foreclosure that borrowers in Los Angeles may want to consider. If you have fallen behind on your mortgage payments and you want to avoid foreclosure, schedule a free consultation with our legal team to discuss the possibility of a deed in lieu of foreclosure transaction as an alternative to foreclosure. Our attorneys at Resnik Hayes Moradi LLP have years of experience helping homeowners avoid foreclosure, and we will work with you to find the best possible solution for your specific circumstances. Contact our law firm today to find out how we can help.