Deed in Lieu of What? Navigating in the Sea of Foreclosure

Behind on your house payment and considering foreclosure?  Have you been getting collection calls and feel like it’s time to give up?  You are not alone – and in this economic climate, more and more people are faced with the question of how to resolve issues with their homes, and how they will be affected long-term.  When you are backed into a corner, it’s tempting to try to get out by agreeing to anything a bank will offer.  However, before doing so, you need to know your options, what you can do, and how a “Plan B” of sorts can work.

What Exactly is a Foreclosure?

In the event of a foreclosure, essentially your lender is calling your loan, and telling you that they can take your house if you have defaulted.  If you remember that huge stack of papers you signed when you purchased your home – somewhere deep in that pile was a clause that allows the bank a security interest in your real estate.  This means that in the event of a default (i.e. you stop paying) the bank has the option to work with you, to ignore you, or to take your house.  Foreclosure is the legal term for an involuntary process through which the lender (bank) goes through to get the real estate.

A Foreclosure is a Lawsuit by Your Lender

In short, the lender files a lawsuit for foreclosure and must serve you (the homeowner) with legal papers.  When the case is up in court, the question is whether or not you have defaulted on the loan, and whether the lender has followed the their states' foreclosure law correctly.  If the lender has, and the homeowner has no legal defense or claim (i.e the bank is wrong and you are NOT in default for some reason), then the bank has the right to judgment and to win the case.  Allowing the homeowner a certain time to come up with all the money is standard in most states (check yours to be sure), the whole case can be stopped if the homeowner can refinance, sell, or make up the arrearage.  It all depends on your unique situation, but in general, if you don’t pay – you may lose your home.

Deed in Lieu of Foreclosure

Now, an alternative to foreclosures has been around for years.  It is called "Deed In Lieu of Foreclosure."  This is a process just like foreclosure, and essentially it means that instead of forcing the bank to come after you for the real estate, you negotiate with the bank and voluntarily relinquish legal rights to the house.  This saves the lender from foreclosure costs and opens the door to talking with the bank about limiting your financial exposure.  This is important because in a foreclosure you can still have a judgment entered against you for the amount of the loss on the property that the bank takes.

Avoiding a Deficiency Judgment

In other words, if you owe a bank $200,000 on a house and you default, and they can only sell the house for $100,000, then the bank can still come after you for the remaining $100,000 – even though they took the house as well!  This is called a "deficiency judgment" and you care about this because this can drastically affect your credit in a very bad way.  A "deed in lieu" is another way to discuss saving legal fees, promising to deliver the house in good condition, and reduce or limit your exposure financially.  Often, a bank will agree to a certain amount that has to be paid if they take a loss on the property.  Often, in exchange for the deed in lieu, you can get them to waive a deficiency.  Still, sometimes you can’t get the bank to make any promises.  Even then, this process takes less time, is less expensive, and less stressful.

Know Your Foreclosure Options

When you are a distressed homeowner – knowing your options and having a way out can be very important.  If you are facing foreclosure, you should first try to refinance or modify your loan.  Only when you are in real distress and know that a foreclosure case has been started or will soon be filed, calling your bank’s mortgage loan (or sometimes their "loss mitigation") department can help.  You have nothing to lose by calling, and it may make a huge difference.  If the bank agrees, then you will be provided a packet of information and documents to complete.  You should always consult an attorney to review any documents you don’t understand, as you may be transferring ownership of the property to the bank.  All in all, while the foreclosure process can be scary, you have some choice in the matter.  Ask for help.  Explore your options.  Most of all stay informed.  I can be reached at: alisalevin@yahoo.com for more information.

Copyright 2009

Alisa M. Levin, Esq.