What are your foreclosure choices?

   Are you behind on your mortgage? Almost half the mortgagees in Michigan are. Do you owe more than your home's worth? Have you decided trying to keep up is not worth the struggle, you're going to let your home go?
   Most people just wait for foreclosure and in Michigan more than a year can pass before the hammer falls. Is there a better way? What are your choices? Foreclosure, deed in lieu of foreclosure, short sale, what's the difference?
   Foreclosure will find you. If you don't do something, the sheriff will show up, post a notice on your front door, and your house will be auctioned off; probably for something less than the mortgage. You'll have to move and whoever purchased the house gets to sell it and pocket the profit.
   What about the "deficiency," the difference between the amount you owed and the amount of the sale? In a foreclosure you are responsible for the deficiency. You may get a Forgiveness of Debt Form 1099C for the amount of the deficiency and may owe the IRS the tax on that "phantom income" (although there currently is a moratorium through 2012).
   If you don't get the dreaded 1099C, there may come a time when a collection company contacts you looking for the deficiency, plus interest. Right now, lenders and collection companies are holding off such collections, but companies are buying up those deficiency contacts and will be coming after people to collect, and they have ten years or more to do it!
   Deed in Lieu of Foreclosure, or DIL, is giving your house back to the mortgage holder without going through the court/sheriff's sale procedure. In most states the lender can still pursue you for a mortgage deficiency after a foreclosure sale. They can sue you and maybe get a garnishment, levy against other assets or get a court order that would put you in contempt of court if you did not come up with the money.
   With a DIL, the disposition of deficiencies is negotiated prior to you giving your house keys back to the bank. DIL is much preferable to foreclosure and looks better on your credit report, but almost all lenders will require you to try to do a short sale prior to accepting a Deed in Lieu of Foreclosure.
   A short sale is the sale of property in which the proceeds are less than the mortgage balance. Short sale agreements come after negotiation between the parties with regard to the disposition of the deficiencies remaining after the short sale. Short sales significantly reduce the hefty legal fees expended in foreclosure, and improves credit report outcomes for the borrower. The agreement also will set forth the disposition of any deficiency which may be required to be paid back.
   In all cases a short sale is the best option. Find a reputable short sale specialist firm, they will not charge up-front fees, will be paid by the lender, and will negotiate the most advantageous deficiency repayment contract.