My friend, Monica, bought a house in California where she resided. From the moment she signed the sales and purchase agreement, she valiantly made an effort to ensure that her mortgage was paid for every month. However, circumstances got the better of her finances and she ended up missing more than 3 months of her mortgage payments. Monica felt like she had no choice but to have her home foreclosed. That was until one of her relatives informed her that a deed in lieu of foreclosure California regulation could prevent her home from getting foreclosed and that it would actually be a much better choice. Her relative also told her that a foreclosed home would remain in her credit report for at least seven years while a deed in lieu would not affect her credit rating at all. Suffice to say, her relative was only half right.

Monica would definitely not have to get her home foreclosed according to the deed in lieu of foreclosure California regulation. However, a deed in lieu was not really that much better a choice than having her home foreclosed as it would also affect her credit score rather badly. When she decided to go for a deed in lieu (DIL), she was basically agreeing to simply hand over the keys of her home to the bank and be done with it. The only difference between what Monica did and having the bank foreclose her home is that the bank did not have to force her to move out of her home as she had already done so voluntarily. Prior to her decision the bank even willingly discussed alternatives with her so that they could prevent any foreclosing activity from taking place. Like many other mortgagers, her bank would prefer not to foreclose any property because of the expense they might have to incur should they decide to foreclose.

A deed in lieu might not have affected Monica’s credit rating as badly as a foreclosure would but sadly the difference is minute compared to other alternatives she could have explored. Monica was still required by law to pay a deed tax as a deed in lieu involved the transfer of her home ownership to the bank. On top of that, the forgiven amount of her debt to her bank was considered as an income because she was no longer liable to pay that amount to her bank any longer. When the time comes, she would be required to pay income tax on the rescinded debt. Her credit rating was also affected. Monica’s credit score dropped rather significantly and she found it quite difficult to even try to rent a place while she slowly tried to rebuild her life. Another downside is that Monica would not even get to have any profit from the sales of her home should the bank have made a profit on her home when it was sold.

Of course, a deed in lieu was not all bad for Monica. The bottom line is that she managed to avoid foreclosure which would have stayed in her credit report for a decade. It was a good thing that the bank decided to forgive all of the debt acquired through the defaulted loan because if they only forgave half of what she owed, she would still be required to pay the other half that was not forgiven. Although she still had to pay taxes on the forgiven debt, she actually saved both her and her bank quite a lot of money as a deed in lieu involved a shorter repossession process and was not as expensive as having her home foreclosed would have been.

In the end, Monica did hand over her keys voluntarily to the bank and they readily accepted the keys in return. It was a rather sad episode of her life because she basically felt as if she would need to start her life all over again. However, she was lucky she did not let the bank simply foreclose her home because that would have caused her more trouble than a deed in lieu.

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Category: Finances
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