A deed in lieu of foreclosure is an alternative to foreclosure that's similar to a short sale, and which can be good for both the borrower (homeowner) and the mortgage lender. 

The biggest advantages for the borrower are: 1) being immediately released from most or all of the mortgage debt, and 2) avoiding foreclosure.

A deed in lieu of foreclosure also has less of an impact on the borrower’s credit rating than a foreclosure.

Advantages for the lender include less time and cost for taking over the property and lower risk of the borrower trashing the property out of revenge.

Both sides need to enter into the agreement voluntarily and in good faith. The property owner gives the property back to the lender in return for the lender canceling the loan and promising not to initiate foreclosure proceedings. The lender may, or may not, agree to forgive any deficiency balance that comes from the sale of the property.

Also, under federal law, a creditor must file a 1099-C form with the Internal Revenue Service (IRS) whenever it forgives more than $600 on a loan balance, which may create a tax liability for the former homeowner because it can be considered income. A 1099-C is used for debt that's being written off by the creditors. It's also known as a Cancellation of Debt form. However, the Mortgage Forgiveness Debt Relief Act of 2007 gives tax relief for some loans forgiven between 2007 and 2012.

The requirements for a deed in lieu of foreclosure include:

  • The residence must be on the market for a certain number of days (ex. 90)
  • There can’t be any judgements on the property
  • The property can’t already be in foreclosure
  • The offer must be voluntary


If you're facing foreclosure and want to keep your house, let us help you. Castle Law Office has been handling bankruptcies for Kansas City clients from more than 14 years. If you need the fresh start bankruptcy can provide, call us today at 816-842-6200 to speak with an attorney. Or click here to email us and schedule your free consultation.