What is a deed in lieu of foreclosure? Can you execute a deed in lieu of foreclosure after Chapter 7 discharge? Is a deed in lieu of foreclosure a good thing or a bad thing? Find out from noted Philadelphia bankruptcy and foreclosure lawyer David M. Offen.
If you are facing foreclosure or fear foreclosure is imminent because you have not paid your mortgage, you are not alone. Many homeowners find that through no fault of their own, their mortgages became unaffordable.
Call us at (215) 625-9600 for your free, no-obligation consultation. We have helped thousands of clients solve their financial problems. When we meet we will explain all of your options, including executing a deed in lieu of foreclosure after filing Chapter 7.
Deed in Lieu of Foreclosure Definition
A “deed in lieu of foreclosure,” also called a “mortgage release” or a “deed in lieu” for short, is a legal document executed by the mortgage lender and the homeowner. The mortgage lender accepts the homeowner’s surrender of the property and promises not to foreclose on the property.
Once the mortgage lender and homeowner execute a deed in lieu of foreclosure, the property belongs to the mortgage lender and they may evict the homeowner and sell the property. Often a move-out date is specified so that the property changes hands smoothly, without need for further legal proceedings.
The homeowner can also negotiate for a release from future financial responsibility for the property, such as a deficiency judgment.
Requirements of a Deed in Lieu of Foreclosure
A mortgage lender will not accept a deed in lieu of foreclosure from just any homeowner. The homeowner must show in good faith that they can no longer afford to pay the mortgage. The mortgage lender may require proof of inability to pay, such as:
- Recent pay stubs
- Recent filed tax returns
- Recent bank statements
- An accounting of monthly expenses
- A letter explaining why the homeowner can no longer afford to pay the mortgage, called a “hardship letter”
What Constitutes a Hardship Warranting a Deed in Lieu?
A “hardship” is a financial setback that is no fault of the homeowner. For example, if the homeowner gets reduced work hours or loses their job, suffers a serious medical condition or injury, gets divorced, or is affected by a natural disaster, they will be able to negotiate a deed in lieu.
Once the mortgage lender agrees to a deed in lieu, in most cases the homeowner will sign a grant deed in lieu of foreclosure, which transfers title to the mortgage lender, and an estoppel affidavit. The estoppel affidavit includes all terms of the agreement, including whether the homeowner will be responsible for the deficiency balance on their account following the sale of the property at auction.
Benefits of Negotiating a Deed in Lieu of Foreclosure
The primary benefit of a deed in lieu is that the property transfers to the mortgage lender in an orderly fashion, without the expense and stress of legal proceedings. Under most circumstances, executing a deed in lieu takes only months while foreclosure proceedings can take years.
While a foreclosure proceedings may delay eviction, eventually the homeowner must leave the property if they cannot pay their mortgage. When negotiating a deed in lieu, the homeowner can ask for a delayed move-out date or a short-term lease of the property.
Almost as important, the homeowner can negotiate a release from responsibility for the deficiency balance on their account, and also negotiate the date by which they must vacate the property.
Last, a deed in lieu of foreclosure is less damaging to the homeowner’s credit score than a foreclosure. A deed in lieu will remain on a homeowner’s credit report up to four years, while a foreclosure can remain for up to seven years.
Drawbacks of a Deed in Lieu of Foreclosure
The primary disadvantage of a deed in lieu is that some mortgage lenders will not grant homeowners a release from responsibility for the deficiency balance. Here’s where a Chapter 7 discharge helps.
If the homeowner files Chapter 7 bankruptcy and indicates that they wish to surrender the property to the mortgage lender on their Statement of Intention, and the Chapter 7 case concludes successfully, the homeowner is discharged of the deficiency on their account following the sale of the property at auction.
This means that the homeowner is not responsible for the deficiency balance on their account regardless of whether the mortgage lender would have released them or not. Following Chapter 7 discharge, a homeowner can avoid foreclosure by letting the mortgage lender know they wish to transfer the property through a deed in lieu. This saves time and money for the mortgage lender, so it is likely they will agree.
Another disadvantage is that a homeowner executing a deed in lieu must generally wait three years before obtaining a mortgage, and must be able to show lenders a positive credit history during that time.
Bear in mind that there is an income limit to filing Chapter 7 bankruptcy.
How a Bankruptcy & Foreclosure Lawyer Helps
If you filed Chapter 7 bankruptcy and surrendered the property to the mortgage lender, you do not have to worry about the mortgage lender pursuing you to collect a deficiency balance. However, having some control over when you must leave the property is greatly advantageous to you.
Let an experienced bankruptcy and foreclosure lawyer help you deal with real property you cannot afford and get you the best terms possible. David M. Offen has over 20 years’ experience helping people struggling financially and facing foreclosure. He will assess your complete financial situation and advise you as to all possible options, including a deed in lieu, a short sale, or a loan modification, and whether you need a Chapter 7 discharge or a Chapter 13 plan to help you repay mortgage arrears. By filing a Chapter 7 or Chapter 13 Bankruptcy, you can clear other types of debt as well.
Call the Law Office of David M. Offen today to schedule your free, no-obligation consultation. Let us help you get a fresh financial start.