Deed in Lieu of Foreclosure
For many homeowners in Los Angeles who have defaulted on their mortgage loan, facing foreclosure is a terrifying prospect. The foreclosure process can be long and taxing and the late fees for missed payments and other costs associated with a foreclosure can add up rather quickly. Fortunately, there are alternatives to going into foreclosure that may be more favorable for California homeowners, one of which is called a deed in lieu of foreclosure. Whether you hope to save your home or simply avoid the foreclosure process, figuring out the best way to respond to the threat of foreclosure can be difficult and intimidating. With a skilled Los Angeles foreclosure lawyer on your side, offering you unwavering support and sound legal advice, you can work to avoid a foreclosure and get out from under overwhelming debt. For more information about deed in lieu of foreclosure and other alternatives to foreclosure in Los Angeles, contact our reputable foreclosure attorneys at ibankruptcyattorneys.com to schedule a free initial consultation.
What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure (DIL) is a transaction in which a borrower signs over the deed to a property to the lender in order to avoid foreclosure proceedings. Typically, homeowners who aren’t able to keep up with their mortgage payments will decide to sell their home and use the proceeds from the sale to pay off the balance on their mortgage loan. If you are no longer able to pay your mortgage and the market value of your home is higher than the amount you owe on the loan, selling your home may be the best way to satisfy your lender and relieve yourself of a debt you can’t afford to pay. Unfortunately, many homes these days are “underwater,” meaning they are worth less than the amount due on the mortgage loan, in which case selling the home will not be enough to cover the full amount of the debt. In this situation, homeowners may consider simply giving the lender the deed to their home rather than going through a foreclosure. This process is aptly named “deed in lieu of foreclosure.”
How Does a Deed in Lieu Work?
If you propose a deed in lieu of foreclosure and your lender agrees, you can essentially walk away from your home and your mortgage and the debt on the mortgage loan will be satisfied. If you are wondering why any lender would agree to receive property that is worth less than the amount they are owed by the borrower, the answer is this: By accepting a deed in lieu of foreclosure, the lender can avoid having to deal with the expense and delay associated with a foreclosure, both of which can be significant. Instead, the lender becomes the owner of the property and can take immediate steps to control its operation and maximize its value. That being said, a deed in lieu of foreclosure is not always in the best interest of the lender, and sometimes, getting a lender to approve a deed in lieu of foreclosure arrangement can be more difficult than you might think. For instance, if your home has been used to secure additional debts, such as a second mortgage, another security interest lien or a home equity line of credit, your lender may find a foreclosure more advantageous than accepting the deed to the property.
What to Expect During the Deed in Lieu Process
As a homeowner, the objective of a deed in lieu of foreclosure is to have the lender waive any deficiency on the sale of the property. To begin the deed in lieu of foreclosure process, you must first submit a financial package to the lender containing information about your income, expenses, assets and debts, as well as details about the circumstances that led to your inability to afford your mortgage payments. During the next step, the lender will schedule an inspection of the property and decide whether or not they want to accept the deed to the property. In some cases, lenders may require that the borrower attempt to sell the property for its fair market value before considering whether to accept a deed in lieu.
Benefits of Deed in Lieu of Foreclosure
The most obvious benefit of successfully negotiating a deed in lieu of foreclosure with your lender is the fact that the agreement will release you from any obligation to pay the mortgage debt. You can also avoid the time and expense involved in a foreclosure, as well as the publicity that goes along with having the bank foreclose on your home. Foreclosures are common, but that doesn’t mean you want everyone to know that you lost your home in a foreclosure. Unfortunately, every step of the foreclosure process is publicized in California, including the final foreclosure deed, which means the fact that you are in financial trouble will become a matter of public record.
Is it the Right Move for Me?
If the amount you owe on your mortgage loan is a great deal higher than the value of your home and you want to just walk away from the property, voluntarily signing over your home to the lender could help you avoid the foreclosure process. However, there are a number of factors that come into play when determining whether negotiating a deed in lieu of foreclosure is the right solution for your specific financial situation, including your income, the balance on your mortgage loan, the extent of your mortgage loan delinquency and your lender’s willingness to work with you, among others. Keep in mind that every case is different and there is no guarantee that a deed in lieu of foreclosure is the best way for you to get out from under your overwhelming mortgage debt. Before committing to a deed in lieu of foreclosure or any other agreement with your lender, it is a good idea to speak to a knowledgeable Los Angeles foreclosure attorney about the options available to you based on your financial situation.
Deficiency Judgments in California
When negotiating a deed in lieu of foreclosure with your lender, one of the most important things to consider is whether the lender will be able to pursue you for any future deficiency liabilities. In a deed in lieu of foreclosure situation, a “deficiency” is the difference between the amount you owe on your mortgage loan and the fair market value of the property. Even if your lender accepts a deed in lieu of foreclosure, the lender may still try to hold you liable for the deficiency by asking the court to issue what is known as a “deficiency judgment” against you. A deficiency judgment is similar to a collection lawsuit for an unsecured debt, except it is against a debtor who has defaulted on a secured loan, such as a mortgage loan. Essentially, a deficiency judgment is a court ruling placing a lien on a debtor for additional money.
In California, lenders who foreclose on properties without going to court (this is known as a nonjudicial foreclosure) are generally barred from pursuing deficiency judgments against borrowers. California law also prevents lenders who agree to a short sale, a real estate sale in which the lender agrees to accept less than the amount the borrower still owes on the mortgage, from pursuing the borrower for future deficiency liabilities resulting from the short sale. And while California’s deficiency judgment laws don’t explicitly apply to a deed in lieu of foreclosure agreement, lenders who accept a deed in lieu will usually waive their right to pursue a deficiency judgment against the borrower. If this is the case, you will want to have the lender put in writing that the deed in lieu transaction fully satisfies the debt.
Something else to consider is whether you will be required to pay federal income tax on the amount of the mortgage loan that is cancelled or “forgiven” as a result of the deed in lieu of foreclosure. Cancelled debt is usually taxed as income by the IRS and tax liability for forgiven debt can be a significant burden for homeowners who are already financially stressed. These are all things that a knowledgeable Los Angeles foreclosure attorney can advise you on.
How Filing for Bankruptcy Can Help
The worst thing you can do when facing imminent foreclosure is nothing. Depending on your specific circumstances, there are several alternatives to foreclosure you can consider, possibly including a forbearance agreement, a loan modification or a short sale. Bankruptcy is another option. You might think that filing for bankruptcy would essentially be digging yourself into an even bigger financial hole, but that is not the case. For many homeowners, bankruptcy is a debt-relief solution that allows them to protect their home, get rid of debts they can’t afford and catch up on their mortgage payments.
Chapter 7 Bankruptcy
Only unsecured debts are discharged in a Chapter 7 bankruptcy, so if you are struggling to pay your mortgage, filing for bankruptcy won’t wipe out that debt, unless you are willing to surrender the asset. However, if you qualify for Chapter 7 bankruptcy and you are able to protect your home, you could eliminate your unsecured debts and free up enough cash to get current on your mortgage and continue making payments. In most cases, Chapter 7 filers are able to protect their home in bankruptcy. If your home has no equity and you know you will lose it, it may be in your best interest to surrender it to the bank. If your home is underwater, a Chapter 7 bankruptcy can eliminate the deficiency judgment, thus preventing the lender from using wage garnishment or other efforts to collect the deficiency. Chapter 7 bankruptcy is generally a good debt-relief solution for borrowers who have significant debt and few assets.
Chapter 13 Bankruptcy
If you can’t feasibly catch up on your mortgage payments right away but you would be able to with time, Chapter 13 is another type of bankruptcy that could help you avoid a foreclosure. Under a Chapter 13 bankruptcy plan, you must be able to continue making your current mortgage payments and catch up on missed payments during a three- to five-year repayment period. Chapter 13 is more appropriate for borrowers who have a steady income and want to protect certain assets, such as their house. Keep in mind that if you stop making payments during your Chapter 13 bankruptcy plan, your lender may be able to proceed with a foreclosure.
The Automatic Stay
One of the most important benefits of filing for bankruptcy is the automatic stay that goes into effect the moment you file a Chapter 7 or Chapter 13 bankruptcy petition. The automatic stay is a court order that makes it illegal for creditors to attempt to collect on debts you owe. This includes creditor harassment, repossession, debt collection lawsuits and foreclosure proceedings.
Consult Our Los Angeles Deed in Lieu of Foreclosure Attorneys
Borrowers in Los Angeles who have been hit with unexpected unemployment, or those who are struggling with costly medical bills or mounting credit card debt may feel trapped and powerless when they aren’t able to keep up with payments on their mortgage loan. For homeowners who find themselves in this situation, with a foreclosure looming, deed in lieu of foreclosure may be a good alternative to going through a lengthy, drawn-out foreclosure proceeding. Unfortunately, it isn’t always easy getting a lender to accept a deed in lieu of foreclosure and most homeowners attempting to negotiate a DIL simply don’t have the time or expertise to see it through to a satisfactory conclusion. If you are considering a deed in lieu of foreclosure in Los Angeles, it may be a good idea to enlist the help of an attorney who can walk you through the benefits and pitfalls of a DIL and answer any questions you have about whether deed in lieu of foreclosure is right for you. Our knowledgeable Los Angeles foreclosure attorneys are experienced in all matters related to foreclosure, bankruptcy and debt relief and we can give you the best chance at avoiding foreclosure.