deed in lieu / foreclosure

[gregp]

Hi,
I tried to sell my house located in NC since March 2009. In October 2009, I was unable to pay the mortgage anymore since I live and rent another home elsewhere. So I decided to try a deed in lieu of foreclosure in December 2009.
As of now, it is still under review... Meanwhile, the foreclosure process has started, sale date mid April 2010 and hearing mid of April 2010. A have only one mortgage.
- What is the best interest for the bank: foreclosure or DIL?
- is it expected that DIL review is so long? Is there a legal timeframe for that?
- Bank told me that in both cases, DIL or foreclosure, I will receive a 1099A and will not owe any money, only taxes on 1099A. Is it correct?
- What if the house is not sold at the foreclosure date? It will be a bank owned property, but then what? Will I get a 1099A?
Thank you in advance for any answers.

[Mensa1]

Most mtg lenders prefer foreclosure over DIL. This thought is foreign to most ppl, but many legal issues can arrise to the mtg lender as a result of DIL. Problems that occur are mostly due to other interests or liens against the debtor, that when not properly extinguished, (irs tax liens, judgment liens, etc), can stay attached to the property and become the problem of the mtg lender, who now owns the property. None of these are problems in a foreclosure, as those liens are all eliminated from the property by the foreclosure action.

So while it seems like it should be simple and straight forward, it isn't really. Lenders that enter into a DIL accept an element of risk that is difficult to eliminate completely, and that is why many lenders would rather foreclose than accept such risk.

Yes, you will receive a 1099-A as stated. While it is complex and difficult to explain in a sentence or two, there are circumstances where you may not have any tax liability even if the 1099 is for a sizable amount. Best advice is to use a tax professional in the year that you receive the 1099, and you will get best consideration toward eliminating taxes owed.

[gregp]

Thanks for the reply. What about the following 3 cases:
- If DIL accepted, I will get a 1099 with difference between balance owed and fair market value
- If house sold at foreclosure, I will get a 1099 with difference between balance owed and price sold
- If house REO, what will I get?

[Mensa1]

Thanks for the reply. What about the following 3 cases:
- If DIL accepted, I will get a 1099 with difference between balance owed and fair market value
- If house sold at foreclosure, I will get a 1099 with difference between balance owed and price sold
- If house REO, what will I get?

correct and correct.
As to REO, the only thing that this will produce is a def judgment, if your state allows the lender to go after you for their loss in the transition of the asset. If not, then the REO has no effect upon you.

[flower04]

It is my understanding (but I'm not 100% sure) that If you are currently in bk (a 13) if you do a DIL, the difference on your 1099 which you would typically be taxed on wont make a difference because you are considered 'insolvent'

I would check this first, but I have heard this now from several reliable sources.