Mortgage Information

Matthew Foley

Matthew Foley

Esq. & MBA

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Deed In Lieu of Foreclosure

A deed in lieu of foreclosure is an alternative way for a debtor to convey his or her property to a lender as opposed to a deed of trust sale or trustee sale.[1]  Even though this method of transferring property to a lender when a debtor is financially in trouble is still used, it has been less utilized because of its risk to lenders.[2]

General Concerns

It is critical that a deed in lieu of foreclosure is properly done to ensure a liability is extinguished in full so the debtor’s deficiency is reduced to $0. Sometimes the liability is not paid in full. For example, lenders can either intentionally or negligently have the debtor contract away statutory protections or create new note obligations in short sales, loan modifications, or more. In the situations where the liability is not paid in full, the “document or agreement between the parties should be clear enough to show that the parties intended the deeding of the property as payment in full.”[3]

A lawyer should know collection-bankruptcy and tax areas of law so that the client isn’t negatively impacted in one of the relevant. For example, a suggestion from a tax professional may ignore conveyance of property issues, whereas a real estate professional’s suggestion may create tax problems such as cancellation of indebtedness income (COD) collection debt. Lastly, a good title company should be recommended to handle the deed in lieu of foreclosure.

Advantages to a Lender

The deed in lieu of foreclosure is faster and less expensive than a traditional foreclosure.[4]

Advantages to a Borrower

The deed in lieu usually waives a debtor’s deficiency if done correctly. Further, a deed in lieu usually does less damage to a debtor’s credit score.[5]

Disadvantages to a Lender

A lender risks the results of a “merger of title”.[6] When property is transferred through a deed in lieu of foreclosure, the lesser title merges into the greater title.[7] Basically, the lender’s secured interest merges into its title ownership interest, the secured interest is dissolved, and any junior liens such as IRS liens gain priority and encumber the property. A trustee sale would wipe out these junior liens against a property, which is better for the lender.[8]

Disadvantages to a Borrower

The debtor would be better protected through Arizona’s anti-deficiency laws, namely A.R.S. § 33-814. Since this anti-deficiency statute typically only applies to a deed of trust sale, a debtor would not qualify for the statute’s anti-deficiency protection if he or she conveys his or her property through a deed in lieu of foreclosure.

The financially-troubled debtor is in a better position to remain on the property, stop paying the monthly payment, and let the property return to the lender through a deed of trust sale. In some cases, a debtor may save money to apply to a new residence through an agreement with the lender; the debtor will maintain the property and vacate soon after the deed of trust sale is completed, and the lender will pay the debtor an extra $1,000 to vacate the property. This agreement implicates the benefits of I.R.C. § 108(c)[9] if the entire mortgage forgiveness act have been met.

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[1] Deed in Lieu of Foreclosure in Arizona, accessed at the McKindles Law Firm website: http://www.mckindles-law.com/articles/deed-in-lieu.htm.

[2]Id.

[3] Information not cited is quoted from the provided text summarizing the deed in lieu.

[4]Supra note 1.

[5]Id.

[6]Id.

[7]Id.

[8]Id.

[9] Income from discharge of indebtedness or COD income. 26 U.S.C. §108.

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July 18, 2017

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July 13, 2017

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Very helpful even though not client (yet)

Matthew represented us at a Trustee meeting when our Phoenix attorney could not be present. He was knowledgeable and helpful. In addition, when my existing attorney became “disengaged”, we contacted Matt and he spent a lot of time helping us understand some issues we were having. He was supportive, helpful, and gave excellent advice even though we were not his clients. I highly recommend him and he will be my first call for any future legal issues.

Doug
May 23, 2017

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I was in a real bind and not knowing the law, I contacted the best reviewed bankruptcy lawyer in town. After the consultation I left feeling better about my situation with a much better understanding of the law. The man knows his stuff and is very knowledgeable. I hired him and he did an amazing job. I literally did nothing but answer questions in an honest manor. The staff is a collection of incredible people, who are kind and very nice and understanding towards your situation. Thank you so so much for everything and would recommend the heck out of this gentlemen. Awesome experience.

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March 6, 2017

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October 21, 2016