I’ve been getting this question a lot from potential clients and some of my friends: I don’t want my property anymore because I cannot afford it, should I let it go to foreclosure, short sale, quit claim, sign a deed in lieu, or file bankruptcy? Here is a rundown of the differences.
A foreclosure can be done with or without a court involved. Typical foreclosures are done without a court because the terms of the mortgage allow a home to be foreclosed so long as proper notices and time periods expire. When a judgment creditor wants to foreclose, that’s when the courts are involved. A foreclosure is the least ideal option to take as it hurts your credit the most. Also once it’s sold at auction, you may have to leave that day or get a few days or months.
You never want to just quit claim title to the lender. When you quit claim title, you are simple stating that you are giving away your right to title and possession to that land. This does nothing to the lien that you are still personally obligated to pay. So while you possession to the lender, you will still owe the lender the mortgage. This may still leave you open to a potential foreclosure or other debt collection procedures the lender has.
Deed in Lieu
This is one step better than a quit claim. A Deed in Lieu essentially gives away your right to title in exchange for a forgiveness of the mortgage. This option is not easily given by lenders as they still want the ability to collect on the mortgage you owe. Additionally, if you have two mortgages with different lenders, the first lender will not agree to this as they will not want to take over the liability for the second mortgage.
A short sale is the best option as it essentially allows you to sell the property and avoid any outstanding mortgage obligations. A short sale also looks a lot better on your credit then a foreclosure would. The problem with a short sale is that it’s not short. The bank has to approve your short sale request, and the process to get their approval could take a very long time. Typically, they will want proof of pay stubs, bank statements, and other assets that you have (similar to those required of one in bankruptcy). If they approve your request, then the lender is essentially saying that they will allow you to sell the home for less then what its worth to facilitate a faster sale. So long as you successfully find a buyer and the home is sold, all your obligations to title and the mortgage will be resolved.
Bankruptcy is often an option that many people turn too when they are facing the choices above. Bankruptcy is essentially the cleaner and faster way of dealing with the property. In some cases though it may only be a good option if it will also resolve various other debt issues you have. In the context of a home in default, filing for bankruptcy resolves your personal liability on the mortgage, it does not resolve the issue to title. However, since you filed for bankruptcy, giving a quit claim or deed in lieu will solve the title issue. A short sale is also still an option when you’ve filed for bankruptcy, however keep in mind you’ll have to be involved with the process which could often take months even after the filing of your bankruptcy.
NOTE: In all these options, there may be tax issues in regards to the tax liability that comes with forgiven debt. Generally if you file bankruptcy, any forgiveness of debt you receive will not be taxes. With the other options, I encourage you to consult a tax professional.