Can a House Discharged in Bankruptcy Have a Deed in Lieu of Foreclosure?

Bankruptcy is one common route people take when they are facing financial burdens, unemployment, lingering sickness, excessive debt, wage garnishments, or other difficulties that make it impossible to fulfill their standing financial obligations. Foreclosure is another, and often the two intersect.

A deed in lieu of foreclosure is another option for a homeowner who is faced with losing a home. With a deed in lieu of foreclosure, the homeowner is essentially surrendering the property to the lender in exchange for forgiveness of the remaining balance of the loan. Granted, the lender must agree – and if the property is worth less than the amount of the debt, the lender has the option to refuse to accept the proposal.

But, those who successfully follow through with a deed in lieu of foreclosure can avoid the pain and hassle of foreclosure proceedings, and do not suffer as big a hit to their credit reports as they would with a foreclosure. Banks often prefer these proposals as well to costly foreclosures.

A home that has been discharged in bankruptcy – most commonly through Chapter 13 bankruptcy – cannot be given away through a deed in lieu of foreclosure. If the Chapter 13 bankruptcy filing is in the courts, then a deed in lieu of foreclosure cannot be pursued without the homeowner dismissing the bankruptcy – which opens up the homeowner for future actions without the protection of bankruptcy.

In other words, the Chapter 13 bankruptcy filing is an attempt to keep the home. While the home is in bankruptcy – assuming the deal goes through – it cannot be the subject of a deed in lieu of foreclosure, since foreclosure has been removed as an option through the bankruptcy.