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Debt Relief – Insolvency – Bankruptcy Information » Foreclosure Help, Insolvency » Be Prepared: Examining Foreclosure Alternative Options

Be Prepared: Examining Foreclosure Alternative Options

Article by Christopher M Lee

As property values continue to depreciate and more and more homeowners are facing the loss of their homes, it is becoming increasingly important to be well informed of the options available. Foreclosure should always be the last resort, as it can be exceptionally devastating to a credit score.

Both a deed in lieu of foreclosure and a short sale are valid alternatives that will have a gentler impact on a homeowner’s credit score. However, there are some key differences that will make each one more suitable to particular situations.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is the most straightforward foreclosure alternative. In this case, a struggling homeowner would voluntarily turn over ownership of a residence (in the form of the deed to the property) to the lender, in exchange for cancellation of loans. In addition, the lender ensures that no foreclosure proceedings will take place, by cancelling anything already underway and promising not to pursue any in the future.

In some cases, a lender may also agree to forgive any deficiency balance that might result from the sale of the property. While this can be a positive action on the part of the lender, it can also be damaging to the homeowner. This is largely due to the potential tax liability associated with forgiven debts. Under federal law, a creditor is required to file a Form 1099C whenever a loan balance in excess of $ 600 is forgiven; this, in turn, creates tax liability for the former homeowner, as the amount is considered “income.”

Thus, the most important issue when considering a deed in lieu is whether the lender will be forgiving the deficiency balance. Sellers should be aware of all of the possible implications and should consult with a qualified attorney if there is any uncertainty; the cost of legal aid could be far less than the possible financial implications of not understanding the situation at hand.

Short Sale

Another foreclosure alternative option is a short sale. In a short sale, the lender agrees to accept an amount less than the actual mortgage through sale, as well as forgive any deficiency balance. Unlike a deed in lieu, with a short sale the ownership of the home remains with the property owner until the sale is completed.

Short sales are usually chosen by lenders who do not want to bear the burden of a distressed property, or do not want that home to further distress other properties in the area. In such cases, lenders typically consider a loss of the deficiency balance worth not being forced to take the property through a lengthy and expensive foreclosure process.

 

The Lee Law Firm aims to provide local residents with high quality legal representation at affordable rates. Their attorneys specialize in all aspects of mortgage loan modification . As Dallas foreclosure lawyers, the Lee Law Firm attorneys understand the pressures their clients face as they battle a financial hardship.

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