What is a deed in lieu of foreclosure?

On Behalf of | Apr 27, 2023 | debt relief |

A deed in lieu of foreclosure and bankruptcy are two different options available to homeowners struggling with their mortgage payments and facing the possibility of foreclosure. Both options can help homeowners avoid foreclosure, but they serve different purposes and have distinct consequences. 

Consider these points if you’re trying to decide which is best for your circumstances:

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a voluntary agreement between you and the lender in which you transfer  the ownership of the property to the lender to satisfy the outstanding mortgage debt, avoiding foreclosure proceedings. 

This has a negative impact on your credit score, but it is generally less damaging than a foreclosure or bankruptcy. The canceled debt resulting from a deed in lieu of foreclosure may be considered taxable income by the IRS.

You must typically be in default or at risk of defaulting on the mortgage and must demonstrate financial hardship. The lender must also agree to the deed in lieu of foreclosure arrangement.


Bankruptcy is a legal process that allows you to eliminate or restructure your debts under the protection of federal bankruptcy laws. You might file for bankruptcy to address your overall financial situation, which may include mortgage issues.

This has a significant negative impact on your credit score, and it remains on the credit report for 7 to 10 years, depending on the type of bankruptcy filed.

Bankruptcy can discharge or restructure various types of debts, including mortgage debt. However, it doesn’t automatically eliminate the mortgage lien on the property. You may still lose the property through foreclosure if you can’t maintain mortgage payments after bankruptcy.

A deed in lieu of foreclosure is specifically aimed at addressing mortgage debt and avoiding foreclosure, while bankruptcy is a broader solution if you’re facing insurmountable debt. Determining which is best for you requires you to take a realistic look at what you can afford.