Workout professionals often ask us whether they should accept a deed in lieu of foreclosure offered by a borrower whose property is now worth less than the debt. What is a deed in lieu of foreclosure? A deed in lieu of foreclosure is where a borrower deeds the real property that is collateral for the loan to the secured creditor instead of going through the foreclosure process. When it works, a deed in lieu of foreclosure has advantages for both the secured creditor and the borrower. The borrower avoids a foreclosure on its record, and gives up responsibility for maintaining the property, paying property taxes and insurance, and providing security. Where there are tenants, the borrower no longer has to assume the responsibilities of being a landlord.
For the secured lender, a deed in lieu of foreclosure terminates a troubled debt more quickly than traditional judicial or non-judicial foreclosure. Instead of waiting at least four months for a traditional non-judicial foreclosure sale to take place, during which time the property can deteriorate, the lender takes title to the property immediately. The secured lender also avoids the cost of foreclosure, the potential cost of a receivership, and the possibility that the borrower will get cold feet at the last minute and file bankruptcy.
So why wouldn't a secured lender take a deed in lieu of foreclosure anytime a borrower offers one up?
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