Can I Just Give My House Back To The Bank?
Foreclosures are on the rise. Nevada has the highest per capita foreclosure rate and California has the largest number of foreclosures (they have more houses). Figures for Detroit show that there is one foreclosure filing for every 51 households. That’s five times the national average. Many people are forced to ask the hard question, can I just give my house back to the bank?
This is a very common question. The process of giving a home back to the bank is called a “Deed in Lieu of Foreclosure.” As good as it sounds, not all banks will take a house back when it is offered
If you have equity in your house, you would fare better by listing the property and going for a quick sale. In many parts of the country, houses are offered thousands of dollars below market and they still have no takers. Consequently, a quick sale might not be so quick.
A California couple put their house up for sale at $100,000 below appraisal and has since lowered it 3 times to $200,000 below appraisal. After six months they are still waiting for their first offer on the property.
Before you pack that U-haul late at night and disappear you might want to consider looking into a deed in lieu of foreclosure. A lender will rarely be interested in taking a property back if more is owed than what the property is worth.
Any settlement agreement entered into must have a total consideration equal to or exceeding the fair market value of the property being returned to the lender. Most lenders will not proceed with the deed in lieu of foreclosure process if more is owed on the property than the fair market value of the property.
A borrower will benefit slightly from a “Deed in Lieu” on a credit report. The loan’s status will be closed but it will reflect that a “Deed in Lieu” was applied for. The reality is that this is slightly better than a credit report showing a full “Foreclosure.”
A distinctive plus in the process is that the foreclosure process will end sooner than if the entire foreclosure process had played out. Your credit report will show less late payments. That in itself will make it easier to rebound from the loss of your home.
If a foreclosure is inevitable, offering it back to the bank is a good idea. You will lose the house sooner or later anyway. Make the personal damage less and allow the rebuilding process a break that will allow you a near normal life sooner.
Advantages of a Deed in Lieu of Foreclosure
1) You are immediately released from most and sometimes all of the indebtedness associated with the defaulted loan.
2) You avoid the embarrassment of newspaper postings, the sheriff tacking a legal notice to your door, a court appearance and a formal sheriff eviction.
Giving the home back to the bank will not save your home, but it will help your future. And the process is less harmful to your credit report than an actual foreclosure.
The Down Side of a Good Deal
Giving the house back to the bank is a good answer to a bad problem but it does have a down side: 1099C, Cancellation of Debt.
If you borrow money from a commercial lender for the purchase of a home and later give the home back to that lender, the lender might later cancel or forgive that debt. Under that circumstance, you may have to include the canceled amount as income for tax purposes.
When you borrowed the money you were not required to include the loan proceeds as income on your tax return because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you originally received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
Cancellation of Debt income is not always taxable.
There are some exceptions. Debts discharged through bankruptcy are not considered taxable income. Additionally, if you lose money from the sale or foreclosure of personal property you cannot deduct that loss.
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