This post talks about the Illinois-specific solution to foreclosures called the “deed in lieu.” If you are reading this for advice for a property not located in Illinois, this probably will not be relevant to your case.
When people are deeply underwater on their home and are in (or about to be) in foreclosure, most do some internet research and learn of the possibility of a “deed in lieu” of foreclosure. The mechanics of a deed in lieu are simple in theory. Section 15-1401 of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1401) sets forth a process by which (1) you offer to give the foreclosing bank the deed to your house, and (2) in exchange for the deed, you get to walk away from the home with no personal liability. It sounds like a good deal, and for the homeowners who want this solution and succeed at obtaining it, it is in fact a very good deal.
Turning over the keys to your house with an Illinois deed in lieu seems like the best solution to your financial problems. This blog post outlines some issues with the deed in lieu process.
Why you should not think that a deed in lieu will solve your problems.
What’s the catch then? Well, the catch is that banks hate giving you a deed in lieu of foreclosure for several reasons. First, a deed in lieu is only an option when it makes financial sense to the bank. You wouldn’t leave a $100 bill on the ground, and banks won’t give up the opportunity to collect against you unless it is sure that it would be financially worse off by attempting to collect against you. That means that you have to provide income and other financial disclosures to the bank so that the bank knows for sure that they have little chance of ever collecting a dime against you. If you have income or assets that the bank can collect, it will probably desire to attempt to collect it.
Second, banks dislike the deed in lieu process because they get cleaner title to the property following a foreclosure sale. Upon confirmation of the foreclosure judgment and sale, all regular liens on the property (including your second mortgage, any liens recorded on the property from past lawsuits, etc.) are eliminated, giving the bank squeaky-clean title to the property. When you purchased the home, hopefully your real estate attorney explained to you the importance of having clear title lest a previous lienholder seeks to sell the house out from under you because the previous owner did not pay. This process of lien elimination does not result from accepting a deed in lieu. Because the title to the property that the bank receives after the foreclosure sale is cleaner, it is worth more to prospective buyers and therefore a completed foreclosure is more valuable to the bank.
You still should ask the bank for a deed in lieu despite what I just told you.
Don’t let this dissuade you from asking for a deed in lieu from the bank if you want it. You might get lucky and find that the bank is willing to accept a deed in lieu. That said, luck is what you are going to need because having a bank accept a deed in lieu of foreclosure is an uphill battle.
Hope for a deed in lieu, prepare yourself in case it is rejected.
Owners of underwater homes have many other and more realistic options than the deed in lieu of foreclosure. Bankruptcy is an option if you qualify. Forms of loss mitigation such as the short sale and loan modification are options. Defending the foreclosure case if you have a good faith defense to the case is an option. Even walking away and giving the keys to the bank is an option.
If you are facing foreclosure, I encourage you to give me a call to discuss these options. There is no obligation or fee for the first time we talk. I can review the documents you have received from the bank or court and let you know where you stand. I will also let you know what help I can give to you. You shouldn’t face your foreclosure alone, and even if you walk out of our meeting with a better understanding of the process, you will sleep better at night.