Deed-in-Lieu of Foreclosure

Written by: Nicole M. Garcia, Esq.

When facing a Foreclosure action knowing what options are available is essential. If the Homeowner wishes to keep the property some of the loss mitigation options possibly available are loan modification, forbearance agreement, and repayment plan. Once those options have been exhausted there are other options, which allow the borrower to voluntarily turn over the property in order to avoid facing the consequences of foreclosure. Some of these options are selling the property as a short sale (Note: assuming the property as no equity) or transferring the property to the bank via a deed in lieu of foreclosure.

A Deed in Lieu of Foreclosure is a document, signed by the borrower(s), which transfers title from the homeowner (usually the borrower) to the bank that holds the mortgage. Many people explore this option after the lender has denied a loan modification or rejected a short sale offer. More often than not, lenders will explore this option with the borrower because it helps them save money on the legal fees that come along when filing a foreclosure action.  Additionally, it brings closure to the issue of default and the foreclosure matter overall. 

The borrower(s) can be affected and thus it’s important to lay the cards on the table and to have 20/20 vision when exploring this option. Although this is not an exhaustive list here are some of the ways a borrower(s) can be affected:

  • Credit Report: A deed in lieu can possibly still show up on your credit report, however the effect is usually less than that of a foreclosure judgment.
  • Deficiency Judgment: A deed in lieu of foreclosure agreement may still provide the lender with the right to seek a deficiency judgment against the borrower(s). A deficiency judgment will allow the lender to file lawsuits against the borrower(s) for the unpaid mortgage debt in an attempt to collect the outstanding deficiency balance. The deficiency is usually the difference between the home’s value and the balance of your mortgage loan. This may be negotiable, which is why it’s so important you seek the assistance and guidance of legal counsel. It is important to  have a skilled attorney attempt to negotiate a waiver of the deficiency as part of the deed in lieu resolution.
  • Tax Consequences: Another area of concern for a borrower(s)exploring the option of a deed in lieu of foreclosure is the potential tax consequences it may bring. A deed in lieu of foreclosure, in Florida, may result in a forgiveness of the debt by the lender. The Internal Revenue Service typically considers this a cancellation of debt. If the mortgage balance is greater than the market value of the home, the lender can issue a 1099C for the difference between the home’s market value and your mortgage balance. The 1099C reports the debt forgiven as income to the IRS. However, this can result in a tax liability for the borrower(s) and they may responsible for the taxes on the amount of debt forgiven and forced to pay. However, a lender does not have to issue the 1099(c) and this is up to them. The 2007 Mortgage Forgiveness Debt Relief Act offered protection from this through December 2017, and that legislation was renewed under the terms of the Further Consolidated Appropriations Act of 2020—but only until December 2020.

If you are currently struggling to make your monthly mortgage payments or have fallen behind, it is important to consult an experienced attorney to learn how you can protect your investment. There are several things you can do to avoid foreclosure, especially if you act as soon as possible. For more information on the foreclosure process, contact The Law Office of Ray Garcia, P.A. at 305-227-4030 or legal@raygarcialaw.com, anytime.