The Deed-In-Lieu Of Foreclosure is when you give up ownership of your home and just walk away. You deed it back to the bank. The bank is happy to accept this because its a clean cut. No legal headaches! They will always accept this; however, it is not a good option for you. The reason it is not a good option is that the bank will typically place a foreclosure on your credit report. This is part of their paper trail to write off your loan. You could even end up with a 1099-C sent to the IRS for additional income if the bank sells the property for less than what you owe. Let us explain what a 1099-C is. Everybody knows that you get paid by a W-2 or 1099. W-2 means your employer withholds taxes. 1099 is for the self employed and no taxes are held back.
For example the bank takes back a house that has a mortgage of $200,000 and is worth $200,000. Back payments, late fees and attorney fees add another $20,000 to the balance. You owe them $220,000 and give the house "back". Believe it or not that bank does not want your house. It is a liability to them. They send a field inspector out since they own it. The inspector changes the locks, turns on the electricity and the gas, but not the water. Then they "winterize" it by keeping the heat on so that the pipes don't freeze and cause damage. But the water is off you say, I know it doesn't make sense.
Once a month the field inspector goes out to check on the property. Needless to say the bank is a motivated seller. They ultimately sell the house for $150,000. Since the bank just lost $70,000 + carrying cost, they will send you and the IRS a 1099-C for the amount they lost. This is how they "write off" the loss. The bank will not tell you this. They are sneaky. Unfortunately I know homeowners that got out of their situation feeling pretty good and got an unexpected back hand January 31st the following year. They were not happy and are still in a bad situation. Obviously no longer do business with that bank. Remember, the banks are sneaky.
This is never an option, unless you get it in writing from the bank that they will not 1099 you on your taxes. A 1099 is reported to the IRS as ordinary income. This means that you must pay federal income tax, social security tax and medicare tax on this amount as if you had earned it. Since their were no taxes taken out like your regular paycheck you have a large bill that you didn't expect. Fail to pay in the next three months adds fees and penalties.
Foreclosure, bankruptcy and bad credit do have an end date. The IRS never forgets!
This is the second worse option of the ten. Call me before you sign 720-541-9991.