Deed-in-Lieu with Chapter 7

[hedgecat]

I am planning on filing a Chapter 7 without any assets per se, although I do own a home in WA State. For various economic reasons, I have no equity in the house and I have no other liens on it. It has been on the market (in an economically-depressed area where values are falling) for over 6 months. Two of those have been as a short sale per agreement with Bank of America. No offers, no chance of selling. In November, I fell two payments behind and in December, three.

I am unemployed with a trickle of self-employment income.

According to BOA's paperwork, I am now technically eligible for a deed-in-lieu and plan on sending in paperwork to them today, officially requesting a deed-in-lieu since phone calls seem to get me nothing but a runaround about this option.

Here are my questions. Will filing Chapter 7 make any difference to BOA in a deed-in-lieu situation? Can a Chapter 7 discharge a secured debt if you want to surrender that debt (I'd obviously rather have the deed-in-lieu than a foreclosure on my credit report).

I hear all the time that bk can help you keep your home, but what if you don't want to?

[HHM]

Let's put aside one assumption...a DIL and Foreclosure are EQUALLY negative on your credit report, so one is not necessarily better than the other.

The problem you can run into with the DIL / Chap 7 scenario is what happens to the deficiency. If the bank wants you to sign any sort of obligation saying you are going to be responsible for any portion of the deficiency, don't do it. That can be viewed as "new, recent" debt and provide the bank with grounds to object to the discharge of that debt in your BK.

[justbroke]

Here are my questions. Will filing Chapter 7 make any difference to BOA in a deed-in-lieu situation? Can a Chapter 7 discharge a secured debt if you want to surrender that debt (I'd obviously rather have the deed-in-lieu than a foreclosure on my credit report).

If the DIL is not recorded before filing, it could cause some procedural issues... such as BOA can't technically proceed while the Automatic Stay is in effect. That means BOA would need to file for Relief From Stay in order to continue the process. When do you plan on filing? Doesn't read as though you're in a rush. Also, I didn't read that you have other debt in order to justify filing a Bankruptcy??? Are you worried about any deficiency that may pop up with that DIL?

I hear all the time that bk can help you keep your home, but what if you don't want to?

Chapter 7 can't help you keep your home if you're behind in payments, can't get a modification, or don't have the money to bring it current. A Chapter 13 bankruptcy is specifically geared to deal with those who are behind in payments on secured debt (house, car, etc).

[hedgecat]

Thanks to both of you. I've been trawling the forum for a situation similar to mine.

Time actually is an issue. I have 40k in cc debt due to a failed retail business last year. Very, very little of what I charged was for personal use and none of it remains for the taking. I have owned my 12-year-old car outright for the past 6 years. I am ineligible for unemployment because I was self-employed and other work that was paying the bills dried up when my clients, themselves filed bk. So, I need to file bk - and I need to file Ch. 7 and soon.

However, I also know that BOA moves verrrry slowly and that a deed-in-lieu could take forever.

I have not initiated the deed-in-lieu paperwork yet and could wait to do so if filing bk was the correct thing to do first. I know you are not giving me legal advice but I guess what I am really asking here is that since I have no other assets (absolutely nothing I'm worried about losing through a Chapter 7), can a home be returned to the lender in the filing without it looking like a foreclosure? It seemed that in one posting someone said it could - it just sounds too good to be true.

[justbroke]

The best way for a lender to receive title to the home or to remove the underlying Mortgage/Note is to foreclose. That's just the cleanest way. A deed-in-lieu (DIL) is used in cases where the title appears to be clean (no other defects or inferior liens) and would make it less costly for the lender than to follow the foreclosure process.

Now, if you surrender a home inside Bankruptcy, that home is said to be Included In Bankruptcy, or IIB. On your credit report, it would show as IIB instead of a Foreclosure. While your credit report would be fine, some lenders (like FHA, and the GSEs) still count that as a "foreclosure" for underwriting purposes.

I don't know what your end game is. In the long run, a DIL, foreclosure and IIB will all affect your ability to get a mortgage in the future. Generally speaking, 2 years seems to be the minimum time between that action and getting a new loan; except in extenuating circumstances that are documented (like medical reasons).

[hedgecat]

Thank you again for your response. I have no intention of buying again for the next 5 - 7 years so I'm actually not concerned about another mortgage but I would like to minimize the hits to my credit report if at all possible (perhaps too late for that). I would like to NOT have the DIL or foreclosure process drag out for months and months. The house is in snowy eastern WA where I'm paying utility bills to keep the thing heated (so pipes don't freeze) and in good condition. If it goes into the spring (which it will), I'll be incurring other maintenance costs I just can't afford. I do actually care about the property and want to be able to turn it over in good, sellable condition.

Thanks again!

[HakunaMatata]

Are you no longer living in the house? Like you, I welcomed the opportunity to surrender my (underwater without a life jacket) house. I stopped paying my mortgage in July and filed C7 in September. My intentions are to remain in the house "rent-free" for as long as possible. I want my lender to follow the foreclosure process; and, I won't consider a DIL as this won't be cost-beneficial for me.

If you're not in the house or don't intend to stay, a DIL will likely relieve you of home owner responsibilities more quickly than a foreclosure (I'm unfamiliar with the WA foreclosure process). I know many lenders are attempting to incorporate deficiencies into short sales and DIL. Be sure to read your paperwork.

Unfortunately, your credit score has likely been adversely affected by missed mortgage payments (my score dropped nearly 100 points). I suggest suspending focus on credit scores and focusing on your immediate needs. Foreclosure, short sale, DIL, and BK will austerely affect scores. Thankfully, scores can be rebuilt.

Best of luck to you!

[hedgecat]

Thanks Hakuna. Coming to grips with all of this is heartbreaking and frustrating but I know you're right. I do not need to live in the house so the sooner I can be "out from under it", the better.

By the way, in case anyone is researching Deed-in-Lieu with Bank of America, I was told today that the reason I don't qualify for a DIL, is that my house has to have been listed as a short sale for at least four months. I couldn't get a normal BOA rep to tell me this on the phone. I finally learned of it from my "negotiator" (who I didn't even know had been assigned to my case). When I asked her how long it might take for them to foreclose (not because I will be living rent free but because I can't pay the expenses), she couldn't tell me. She seemed to think it might be "less than a year". Ugh!