Deed in Lieu of Foreclosure

In depth

A deed in lieu lets the borrower hand over the property and walk away, with the lender canceling the debt. The lender saves foreclosure time and cost; the borrower avoids the credit damage of a foreclosure judgment and may avoid deficiency liability. Misconception: deed in lieu does not eliminate junior liens; the lender accepting the deed takes subject to all junior encumbrances, which is why lenders often require title clearance first. Practically, in seller-financed deals, deed in lieu provisions are sometimes built into the original contract to streamline default resolution. Both parties should sign written agreements stating debt cancellation and tax reporting (Form 1099-C). Borrowers should consult tax counsel because debt cancellation can be taxable income unless an exclusion applies.