One of the alternatives to foreclosure is a “deed in lieu of foreclosure.”  Simply stated, this means that rather than making the lender go through the foreclosure process, the home owner agrees to execute a deed for the property transferring it to the lender.  In turn, the lender agrees to accept the deed (and transfer of title) and not go through with a foreclosure sale.  In theory, a deed in lieu sounds like a good alternative for many people who have decided they want to give up the property and it saves the lender the time and expense of a foreclosure sale, and the risk that the home owner may file a Bankruptcy case to stop the foreclosure.   In reality, rarely does it work out for home owners.  The primary reason lenders are usually unwilling to accept a deed in lieu of foreclosure is that in a foreclosure sale, all junior liens on the property (second mortgages or lines of credit, mechanics liens, judgment liens and other claims)  are wiped out as far as the property is concerned.  It is usually better (and safer) for the lender to simply proceed with foreclosure to get a free and clear title, especially in states (like Georgia) where non-judicial foreclosure is a relatively quick and inexpensive process. Second, merely deeding property back to the lender does not get the home owner out of a deficiency claim by the lender.  To the contrary, the lender may sell the house for far less than market value and the home owner will get a big bill (or lawsuit) for the rest of the debt.  Any deed in lieu should be part of a larger settlement agreement with the lender either waiving a deficiency or agreeing to a firm settlement amount the home owner can afford to pay.  Additionally, if the lender takes a loss and writes off all or part of the debt, they will issue a 1099 for the “forgiven” debt and that means the home owner may have tax liability for the forgiven debt (treated as income).  While the home owner would need to see a good CPA to determine how much liability they may have, keep in mind that the process has resulted in trading a dischargeable debt (a deficiency claim) into a non-dischargeable debt (state and federal income tax) in Bankruptcy.  Finally, a deed in lieu of foreclosure is reported on credit reports and it leads to a drop in credit scores about the same as a foreclosure.

There are circumstances in which a deed in lieu of foreclosure may work out for the benefit of the lender and home owner if it is a part of a larger settlement agreement.  Most good Bankruptcy lawyers have experience in negotiating these agreements with lenders, and it occasionally allows the client to avoid Bankruptcy.  If this is an issue with you, call a local Bankruptcy lawyer and make an appointment.