Negotiating a Deed in Lieu of Foreclosure After Bankruptcy

English: Sign of the times - Foreclosure

English: Sign of the times – Foreclosure (Photo credit: Wikipedia)

The same problems and questions often arise on bankruptcy forum websites about negotiating a deed in lieu of a foreclosure, especially after filing for bankruptcy protection.

What Exactly is a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is a deed instrument in which a mortgage borrower conveys all interest in a real property to the mortgage lender to satisfy a loan that is in default and avoid foreclosure proceedings.

What are the Advantages of Negotiating a Deed in Lieu of Foreclosure?

The immediate advantage of a deed in lieu of foreclosure to the borrower is that it immediately releases him or her from most or all of the personal indebtedness associated with the defaulted loan. In addition, the borrower avoids notoriety of a foreclosure proceeding and may receive more generous terms than would be received in a formal foreclosure. The borrower would also take less of a credit hit than what happens during a foreclosure, and the time for conveying a deed in lieu of is a lot less than the time for foreclosure.

Advantages of a deed in lieu of foreclosure to a lender is the reduction time and cost of repossession of the property, a lower risk of borrower retaliation and vandalism, and certain advantages if the borrower files for bankruptcy protection.

What are Some Problems Associated with a Deed in Lieu of Foreclosure?

  1. Every bank has their own rules about deed in lieu of foreclosure. There main objective is to preserve as much of the principal and interest their loans generated in the first place. If there are junior liens involved in the property, a deed in lieu of foreclosure is a less attractive option to a lender, and the lender will almost always refuse the offer and foreclose on the property.

  2. Both sides of a deed in lieu of foreclosure must enter into the transaction voluntarily and in good faith. Since the instrument must be voluntary, lenders will often not act upon the deed in lieu of foreclosure unless they receive assurance through a written offer from the borrower that conveys the offer is being made voluntarily.

  3. The two year right of rescission stated in The Home Equity Theft Prevention Act is not a risk many of the banks and title insurance companies are willing to take with a deed in lieu of foreclosure.

  4. The bankruptcy process presents both advantages and disadvantages for mortgage companies when dealing with a deed in lieu of foreclosure. The automatic stay of bankruptcy can completely stop the foreclosure process providing opportunities for a borrower to negotiate for a deed in lieu of, but it can also extend the time frame of negotiations and limit the contacts. Most banks want all their money plus interest on their loans, and bankruptcies have a way of discharging those banking interests. The bankruptcy process complicates negotiations for a deed in lieu of foreclosure in a variety of legal ways.

  5. Regardless of what some debtors filing bankruptcy might think, mortgage banks have the last say on homes in loan default. They can foreclose on the property when it is all said and done. Knowing this fact can just simply create a problem for both borrower and lender.

If you are having foreclosure problems along side of bankruptcy matters, allow us to direct you to a bankruptcy attorney in your area.

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