Lenders will sometime offer customers whose homes have been placed into foreclosure status an alternate path. As its name suggests, a “deed in lieu of foreclosure” is not foreclosure, but there are consequences that are just as serious.
When a lender forecloses on a home, it has to jump through many legal hoops to take possession of the home. You can imagine that it would just as soon not have to go to all the trouble. In some instances, they will offer the homeowner a deed in lieu of a foreclosure. Instead of a foreclosure, the homeowner instead signs a deed over to the lender. The deed in lieu short circuits the foreclosure process and allows the lender to take possession of the home without it going to the trouble of the foreclosure process.
The upside for the homeowner is that she gets the transfer of the home out of the way. If she’s lucky, the lender may also offer some cash for signing the deed in lieu. If she’s very lucky, the lender may agree not to pursue her for any shortfall owing on her mortgage.
Unfortunately, the lender cannot promise that there won’t be any ill consequences. When the next January rolls around, the homeowner can expect to find an unwelcome piece of mail in her mailbox. It will be an IRS Form 1099 showing that some of the debt from her mortgage was forgiven. That forgiven debt will be considered income by the IRS, and it will be taxed. You can almost bet that the homeowner will be unprepared for that tax bill.
If you receive such a 1099 and can’t pay the taxes, you should consider filing bankruptcy before it becomes a tax liability. While you can eliminate a deficiency from the sale of a home in bankruptcy, it will take at least three years to get rid of taxes you owe.
If you have questions about the consequences of a deed in lieu of foreclosure and how bankruptcy may help after you sign one, we hope you’ll come in for a free, no-obligation consultation with an experienced Colorado bankruptcy lawyer. You can schedule an appointment by calling 303.331.3403 of by using our online scheduling system.