Liquidation Options

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What can you do if you fall behind on your mortgage payments?

You have two options, either home retention or liquidation, but you must act quickly. These options are often determined by your lender. In this section we will discuss liquidation options in detail. Liquidation options are designed for the homeowner who cannot afford to remain in the home and must move out. The most common liquidation options are: the sale of your home, deed in lieu, short-sale, and other programs that are unique to your lender.

Can you sell your home while your property is in foreclosure?

A borrower who is in default can perform a full sale of the property while they are in default. A full sale of the property is a sale where the homeowner has enough equity to pay off all liens in full. You can either perform a “for sale by owner” or hire a Real Estate Agent to list and handle all the procedures.

A “for sale by owner” requires that you find the right type of buyer, preferably, one who has certified proof of funds to purchase your home immediately. Make sure that you investigate all potential investors before you sign anything, thoroughly read any fine print, and be especially cautious if their words sound too good to be true. Find potential investors by asking family, friends, and real estate agents for recommendations. Do your research and try to confirm that they are not trying to defraud you, because there are some risks to selling to investors, such as: the fact that you may not sell your home at a true market value, the cash buyer could potentially be a scam, and if the cash buyer is a legitimate foreign investor, it could take much longer to close than with a domestic buyer. To prevent this from happening to you, hire a real estate agent that is familiar with selling to investors. Beware of foreclosure rescue scams! Consider asking for proof of funds and use an escrow company to hold the funds until it’s time to close. Don’t sign anything you don’t understand and don’t transfer ownership of your house to anyone, you could end up losing your home. Also, consider that since generally there are no agents, there are no fees and commissions involved in the process.

If you hire a Real Estate Agent to list and handle all of the procedures the Agent may have the experience to work with the lender to delay the foreclosure and perhaps accept a short payoff. Also, an Agent lists the property everywhere on the web and advertises it, thereby, getting more exposure for the sale.

If you decide to use a Real Estate Agent please be sure to check the California Department of Real Estate License (DRE) to confirm that the Real Estate Agent is licensed to perform this service.

What is a short sale?

A short sale is the sale of the property where the homeowner doesn’t have enough equity to pay off all the liens on the property and the lender(s) has agreed to accept the net proceeds of the sale to satisfy the lien. The homeowner may face a deficiency judgement or be required to repay the deficiency to the lender.

When you list your home for sale in a short sale transaction, your lender and/or servicer must accept the buyer’s offer before an escrow is opened to sell your home. The short sale process varies from each lender. Short sales can have a high risk of failure and by hiring an Agent to assist in the short sale you can increase the chances of getting the highest possible price. This option is considered to have a high risk of failure because buyers generally try to undervalue the listed purchase price and the lender has the final say on whether it’s enough to satisfy the debt. Not to mention, short sales are also a race against time.

If you conduct a short sale the amount of debt that is forgiven could affect your taxes. For example, if you owe your lender $300,000 and your lender agrees to conduct a short sale and settle for $250,000, your lender has forgiven a $50,000 debt. This forgiven debt could be considered taxable income. In California, taxation on canceled debt does not apply in most circumstances. Lenders cannot pursue deficiency judgments against sellers. Consult a licensed and qualified tax or legal professional for specific tax advice.

If you decide to use a Real Estate Agent please be sure to check the California Department of Real Estate License (DRE) to confirm that the Real Estate Agent is licensed to perform this service.

What is a deed in lieu?

A deed in lieu agreement is an arrangement where you voluntarily give the lender that owns your mortgage the deed to your home. Homeowners agree to deed in lieu agreements in order to avoid foreclosure. Please keep in mind that a deed in lieu is not something that’s offered to every homeowner and not all lenders offer this option. This option typically requires the homeowner to attempt a sale of the property first. In order to be released from the responsibility of the loan, the lender or servicer must agree to accept the responsibility of the loan. It’s important to remember that your lender has no obligation to accept a deed in lieu agreement.

When you hand over the deed, the lender releases its lien on the property. This allows the lender to recoup some of the losses without forcing you into foreclosure. When you turn over your deed, the lender also releases you from anything else you owe on the mortgage.

What is cash for keys?

It is a written agreement between the occupants of the house and the lender agreeing to move out by a certain date and leave the house clean and in a “broom swept” condition. The agreement includes a promise from the occupants that they won’t vandalize the property.

The amount that the lender is willing to pay the occupants may depend on how fast the occupants move out of the property. Homeowners should also keep in mind the tax consequences of a “cash for keys” arrangement. Your lender will report the payment to the IRS, and homeowners will need to report the payment as income.

When should you consider a bankruptcy?

The moment you file for bankruptcy relief (including an emergency petition) an automatic stay (injunction that halts actions by creditors to collect debt) goes into effect that prohibits your lender from going forward with the foreclosure sale. This automatic stay can give you time to catch up on the defaulted amount. Additionally, bankruptcy can delay or stop the foreclosure process as long as the home hasn’t been sold.

What is the impact of a foreclosure to your credit score?

According to FICO:

• Foreclosure: A foreclosure will remain on your credit history for up to 7 years and can decrease your credit score up to 160 points.
• Short Sale: up to 7 years and 100 to 150 points.
• Deed in Lieu: up to 4 years and 100 points.
• Cash for Keys: up to 4 years and 100 points.
• Bankruptcy: up to 10 years and 130 to 150 points.

What are some tips to rebuilding your credit after embarking on one of these liquidation options?

• Identify the cause of your foreclosure.
• Check your credit scores and reports regularly.
• Make a budget and stick to it.
• Pay your bills on time.
• Get a secured credit card.

Are my taxes affected?

If any principal is forgiven, then it’s considered income and it’ll be reported to the IRS. The amount of debt that is forgiven could affect your taxes. This forgiven debt could be considered taxable income. In California, taxation on canceled debt does not apply in most circumstances. Lenders cannot pursue deficiency judgments against sellers. Consult a licensed and qualified tax or legal professional for specific tax advice.

Who can you call for free and reliable help?

Our experienced staff can discuss your foreclosure with you and help you explore all your options to save your home. We can help you work with your lender, to identify your options.

If you are a resident of the County of Los Angeles, you may apply to the County of Los Angeles Mortgage Relief Program.

What happens if I lose my home?

Call 211, L.A. County’s information hotline, for low-cost housing and shelters, mental health services and food assistance. Call your local housing authority for information on Section 8 or low-income housing.

Watch out for scams!

Many people and businesses will promise to help save your home. Most will just take your money, do nothing and you’ll lose your home. Don’t become a victim of a foreclosure rescue scam. If you have been scammed call us right away to file a complaint. All our services are free!

If you have any questions, please contact us through one of the methods listed below:

• Phone: (800) 593-8222
• Email: homehelp@dcba.lacounty.gov
• Online: dcba.lacounty.gov

County of Los Angeles Department of Consumer and Business Affairs. Last change: Nov. 19, 2024