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Deed in lieu vs foreclosure or bankruptcy

I'm in a situation that seems to be unique. Let me try to explain.

I have 2 investment properties, that are now in negative equity and still going down. I have been supporting them for over 2 years now, but getting very close to not being able to pay for them any longer. Have lost a lot of money on these investments.

One of the properties qualifies for a deed in lieu as its been on the market for longer then 3 months, the other, unfortunately has not. I have not been actively trying to sell it as nothing is selling so I did not bother to put in up for sale.

I'm now facing a dilemma, should I deed in lieu the properties, or foreclose or go to bankruptcy court. I still do not entirely understand how my credit is effected in each scenario.

Thanks in advance for any positive advice that you can give.

Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Benchman,

Welcome to our forums.

The credit effects of foreclosure, deed-in-lieu and bankruptcy are all damaging no doubt. But yes, there's a difference in how a deed-in-lieu and foreclosure can affect a borrower. Know how foreclosure affects credit.

In general, a deed-in-lieu has less negative impact as compared to foreclosure. Know more....

As far as bankruptcy is concerned, it is indeed damaging if it's chapter 7, a slightly less if it's chapter 13. This is due to the fact that in the former case, you need not pay anything and get rid of your debts through the sale of your assets. But in chapter 13, you can start paying off apart of your debt and this implies that you are trying to get current on your loans, which is positive and hence your credit score is affected comparatively less than that of in chapter7. However, in general, a bankruptcy lowers your score by 150-200 points.

Good luck

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Benchman,

I think deed-in-lieu is the better option. It will have less negative impact on your credit than foreclosure and of course, bankruptcy.

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evolovik26's picture
evolovik26 | Joined: August 15, 2007 11:43 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Ill disagree with jenkin there as far as credit impact is concerned I would say the bankrupsy is the least impact you can have. Once the BK has been started your creditors can no longer report your debt delinquent so you get the hit from bk and thats it (most ppl can rebuild in 2 years) in all other situation your bank wouldnt even concider negotiating till you are 2-3 months behind and then your credit is shot. Add a foreclosure or deed in lieu and you are looking at a 7 yr record and your credit way below radar.

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benchman10's picture
benchman10 | Joined: October 8, 2007 07:20 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks for the advice, keep it coming.

I'm thinking the deed in lieu is going to cost me in tax burdens plus keeping the payments on time (more bleeding). The bankruptcy can give me a new start. My primary home and existance is not at risk, just my investments. I can afford to pay my monthly costs.

I have had conflicting opinions from lawyers on what assets are at risk in a [url=http://www.mortgagefit.com/bankruptcy/chapter7.html]Chapter 7 bankruptcy[/url]. The 2 main concerns for me are:

1. Does my wife's assets get involved in the bankruptcy (even though she is not on the mortgages and I do not want to bankrupt her)
2. I have a side business (S-Corp), and am 100% owner, does those assets get exempted?

Thanks in advance

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

1. Hello Eugene, as far as I know, chapter 7 remains in the credit report for 10 years while chapter 13 is there for 7 years. So, will that not damage the report as well as my eligibility to qualify for any other loan?

2. Benchman, regarding your question I can say that it might involve your wife's asset if there is any non-exempt jointly held marital property. She can lose her interest in a jointly held marital property if you are in a community-property state.

If you can tell the state where you live then only I can help you to find out whether your side business is exempt or not as it depends on the state laws

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evolovik26's picture
evolovik26 | Joined: August 15, 2007 11:43 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

to jenkin - BK is on your record for up to 11 years but it doesnt affect the credit rating past the initial hit. And the first thing that is done when filing a BK is all the companies recieve a note from the court preventing any activity against the borrower so there is no further credit damage. As far as being on the credit report (there is a record but most lenders will not look at anything over 2 years ago) its better to have a bk and 650 score then no BK and 480 score

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benchman10's picture
benchman10 | Joined: October 8, 2007 07:20 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I'm in GA

Just got back from a lawyer yesterday. They were saying that I can treat this as a business bankruptcy as the properties were for investment under sole propertiership.

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

1. Thanks Eugene for clarifying my question.

2. Yes Benchman, you may file a business bankruptcy or chapter 11 if you want to continue business and repay the loan at the same time. In order to be eligible for filing chapter 11 in Georgia, your debt has to exceed the limits of chapter 13 which is $250,000 secured and $750,000 unsecured but total less than $2,000,000.

You should consult a lawyer for further assistance.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I dont know if I am going to make sense or not. This last year our daughter was diagnosed with a very rare disease and has required a couple of brain surgeries and treatments. Because of this, I am no longer able to work to care for her and we were left 30k in medical bills plus credit cards that we used for living while we were in NY or Seattle for the various treatments (we live in Idaho).

My question is, because we cannot afford our mortgage because of my loss of income can we do [url=http://www.mortgagefit.com/bankruptcy/chapter13.html]Chapter 13 bankruptcy[/url] and Surrender our home? Or do you have to do Chapter 7 to do foreclosure. I don't quite get it because everything about Chapter 13 says to file it to stop your home from going into forclosure however we feel like we should try to repay the debt we aquired through Chapter 13. That and we would like to keep what assets we do have which we would not be able to through Chapter 7. Can someone explain this to me? Thank you greatly!

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome April,

Chapter 13 also helps in re-organizing your debts. You will be able to retain your property even after filing chapter 13. In this chapter of bankruptcy, you will be a given a new payment plan by the lender which will help you in repaying the debts within the next 3-5 years. Whereas in chapter 7 bankruptcy, the repayment of debts are done from the sale proceeds of the debtor's assets. However, you will be able to reaffirm your debts in Chapter 7.

However you should note that there are various other ways to [url=http://www.mortgagefit.com/foreclosure/17ways-avoid.html]avoid foreclosure[/url]. To know more about them, check out the following link:
http://www.mortgagefit.com/foreclosure/17ways-avoid.html

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

If we do a deed-in-lieu would it affect other assets?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi tina,

If you go for a deed in lieu, the deficient amount resulting from the sale of the property is forgiven by the lender and you will have to pay taxes on that forgiven amount. I do not think your other assets will be affected due to this. To know more about deed in lieu, check out the given link:
http://www.mortgagefit.com/deed-lieu.html

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have two rental properties, a house in MN and a condo in FL. I lost my job am still current on the house but not the condo. I tried to short sale and deed in lieu, but the PMI won't approve a deed without $10,000. Now the association is close to foreclosure, too. Should I just file for bankruptcy and get it over with.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Margaret,

You can definitely file bankruptcy before foreclosure but remember it will affect your credit badly. It would have been better if you could have taken a personal loan of $10,000 and go for either a deed in lieu or a short sale.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Husband and Wife - 66 yrs. and 62 yrs. old. Lost our jobs, living on savings. Can only last 8 more months on our savings. Cannot sell our house. Have no other loans except house. What should we do, file bankruptcy or when our savings run out let the bank foreclose and loose our home.? We have an interest only loan. Still owe $800,000.00 on house.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Plato,

I can understand that you're going through a tough situation. Are you still current on your payments? If not, then you may request the lender for a deed in lieu.

In deed in lieu, your property will be sold by the lender to recover his debts. The deficient amount from the sale of the property will be forgiven. But it will lower your credit score by around 250 points.

If you are current on your payments and want to save the property, then you can try to refinance it at a lower rate.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

But if you do a deen in lieu you receive a 1099 at the end of the year which is considered a gift and is taxed @ 25%, correct?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Hope,

In case of a [url=http://www.mortgagefit.com/deed-lieu.html]deed in lieu of foreclosure[/url], though the lender forgives the deficient amount, you won't be liable to pay the taxes as per the Mortgage Debt Relief Act. To know more about the Mortgage Debt Relief Act, check out the following page:
http://www.mortgagefit.com/california/debtrelief-act.html

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My husband died suddenly and left me in a difficult financial situation - I have a good paying job and am working through things as I go - but there is no extra ready cash on hand. or in the esstate hopper. I have a plan worked out where I can pay all of my joint debts plus the house and living expenses, except for the Wyndham vacation timeshare deeded NC. I still owe money on that loan plus monthly maintenance fees. I just do not know what to do - I thought foreclosue would be good since it is not my primary residence but now I am not sure b/c i read here on the forum I might have to pay the diff if the company can even resale? Timeshare business I am sure is down like everything else. I do not want to keep it and the company does not seem receptive to any conversations about what I can do. any advice?

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

You can contact your timeshare company and apply for a loan modification. If the interest rate is reduced by the lender, it would become easier for you to pay off the loan. If the lender does not agree to it, then you can apply for a deed in lieu and sell off your property. You won't liable for the deficient amount then.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am in a situation where I have been unemployed for 1 1/2 years and unemployment ran out. Husband has income weekly, but still in negative with payments including the mortgage. Are just about 90 days late and the mortgage loan servicer says that we do not qualify for deed in lieu at this time only foreclosure. What would be the best option of the 2 or should we file chapter 13

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi lpt!

Welcome to forums!

Deed in lieu is a better option compared to a foreclosure. Unlike foreclosure, you won't have to pay the balance amount resulting from the sale of the property. However, the credit affects in both the cases are same. Again, it will be the lender's discretion whether or not he would help you with the option of deed in lieu. I would suggest you to negotiate with the lender once again for a deed in lieu. In case, the lender is not ready, then you can go for [url=http://www.mortgagefit.com/bankruptcy/chapter13.html]Chapter 13 bankruptcy[/url].

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

we filed for chapter 13 three years ago and surrendered our home. we moved to another state. We received a foreclosure notice from the bank. Apparently, the home is still in our name. Can the mortgage company foreclose on us now or our we protected by our chapter 13? help

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Teresa,

Though you filed bankruptcy, the lender will be able to foreclose as he holds the lien on your property. However, the lender will not be able to come after you for the balance dues resulting from the sale.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We can't afford to pay to have our home repaired and want to let it go should I do a bankruptcy or foreclosure. I'm the only one on the loan but I had a chapter 7bankruptcy 7 hrs ago

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Hova!

Welcome to forums!

You won't be able to file bankruptcy before 8 years of your previous filing. In such a situation, you can contact your lender and apply for a deed in lieu of foreclosure. This will help you in getting rid of the property and you won't be liable for the deficient balance resulting from the sale of the property.

Feel free to ask if you've further queries.

Sussane

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akirasmith's picture
akirasmith | Joined: November 11, 2010 11:27 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

If you face an overwhelming dilemma of the decision to file for bankruptcy, foreclose on your home or to request a short sale, short selling is what you want to take fully into account before a lender files to ignore in its home.One way to avoid that exclude your home and bankruptcy is to contact your lender and get approval to do a short sale, which means the sale of your home for less than its worth.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We have 6 residential investment properties that are bleeding us to death with tenant turnovers, swatters, judgments and repairs.....have credit scores over 800 and never been late! So the mortgage companies won't negotiate with us. No more money and have been advised by the attorney to stop pay and do chapter 7 for relief..........any less drastic options?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Jerwil,

Unless you're late on your mortgage payments and you're facing financial hardship, the lender will not be ready to help you in this matter. If you can afford, stop paying the dues for a month and try to negotiate with the lender in order to get a deed in lieu of foreclosure. This will help you in selling off the property and you won't be liable for paying the deficient balance resulting from the sale of the property.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Is it possible for the owner to do a deed in lieu after a petition for bankruptcy chapter 7 is file? if should not, why not?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Jose!

Welcome to forums!

If the bankruptcy has been already filed, then you cannot go for deed in lieu of foreclosure. The lender will not consider your request before the bankruptcy filing is discharged. This is because the court will issue an automatic stay against all the creditors and they won't be able to take any actions regarding your account.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

have had changes to income due to husband in jail and now with loss of income difficult to maintain payments for primary and only residence. have applied for assist with pnc mortgage and was refused. want to leave home and wondering what options are. home in my area are not selling. have no equity to speak of.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome cryan,

You can apply for a [url=http://www.mortgagefit.com/deed-lieu.html]deed in lieu of foreclosure[/url] in order to get rid of the property. Moreover, you won't be liable for paying off the deficient balance resulting from the property sale. However, it will be the discretion of the lender as to whether or not he will approve your request.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

i have an investment house in CA and lived in NJ payment
wise is it better to forclose the house. It is scheduled for forcosure already and we are trying to do deed in lieu, help.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome apso,

You should write a hardship letter to the lender in order to get a deed in lieu of foreclosure. However, it will be the discretion of the lender as to whether or not he will accept your request for a deed in lieu of foreclosure.

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bombdigity702's picture
bombdigity702 | Joined: February 7, 2011 07:24 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

We have 2 properties, our primary residence and a rental house. We are in Las Vegas, NV.

I have been unemployed for 3.5 years. My husband just had his pay cut in half.

We contacted our lender, who holds the mortgage for both properties, to apply for modification on both properties.

Our rental house is in my name & my husbands name. Our primary residence is in my husbands name & his moms name. His mom lives on the property in a casita.

In July we contacted our lender to let them know that our savings was empty and we couldn't afford to make any more payments on our rental house. Our last payment on the rental was in September. We applied for a loan modification in October. We also applied for modification on our primary residence in July.

Our lender (SunTrust Mortgage) told us this morning that they can't modify our rental. That our monthly debt is to much, that we are to upside down and they can't help us. So they are proceeding with foreclosure process.

We were also told on our primary residence, that is in my husbands name & his moms name, that they together make to much money and we don't qualify for the government HOPE program modification.

So basically we have been told no to any type of help.

We have met with an attorney who told us they might be able to get a short sale. We have a meeting with a different attorney this Wednesday.

We are trying to decide which option would help us. Deed in lieu or bankruptcy? My husband is incredibly frustrated and ready to walk away, but his fear is the taxes that would be owed after foreclosure and having our money or assets seized.

Thank you ahead of time for suggestions!

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi bombdigity!

Welcome to forums!

Rather than going for bankruptcy, it will be better if you could consider the option of deed in lieu of foreclosure. If the lender accepts your deed in lieu of foreclosure option, he will sell off the property to recover as much dues as possible and forgive the rest of the balance amount. In case of primary property, your husband won't have to pay any taxes due to the Mortgage Debt Relief Act. However, in case of the rental property, you and your husband will be liable for paying the deficient balance in full.

Feel free to ask if you've further queries.

Sussane

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bombdigity702's picture
bombdigity702 | Joined: February 7, 2011 07:24 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

I want to make sure I understand.

On our primary residence, a DIL, if accepted, will wipe out any remaining balance on the loan as well as the taxes.

On the rental house, a DIL, won't? We'd still be responsible for paying whats left after its sold?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi bombdigity,

The lender will forgive the deficient balance resulting from the sale of your primary residence whereas you will be liable for paying the deficient balance in case of the rental property.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a mortgage modification, but still the monthly payment is high, My husband died and is only my income. The bank is no willing to any other adjustment, so my questions is what option is best bankruptcy, foreclosure or shortsale.

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Mayra,

I think it will be better if you could apply for short sale in order to get rid of the property. You should contact your lender and apply for short sale by mentioning your hardship.

Thanks,

Jerry

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