Options Before NOD
Your Options When Behind, But No Notice of Default
You have missed payments but no Notice of Default has been recorded. You still have meaningful leverage, but time is shrinking. The closer the bank gets to taking the property back, the less reason it has to negotiate.
Your Leverage Is Shrinking
Each month you go without paying, the bank moves closer to recovering the property, and your leverage shrinks. You are no longer in your strongest position, but you are not in the most urgent one either. This is the window where a well timed strategy can still produce a clean exit.
Do not wait for the Notice of Default to decide. The further into the process you go, the fewer good options remain.
Strategies Before NOD
Timed Short Sale
If you are concerned about a 1099-C or about 30, 60, and 90 day credit lates, begin a short sale timed so you stay in the property as long as possible while balancing 1099 risk, foreclosure risk, and the benefit of not paying the mortgage.
This is a tradeoff between credit impact and time in the property. As you extend time in the property without paying, you risk foreclosure and a potentially higher 1099-C or 1099-A. The approval letter must mirror California 580b so you do not turn a non recourse loan into a taxable event.
Deed in Lieu
Submit a deed in lieu package to the bank. You still have meaningful leverage because no Notice of Default has been recorded, but time is shrinking.
The final terms of the deed in lieu control whether the bank can pursue you for a deficiency and how the transaction is reported to the IRS. A poorly drafted agreement can create a tax bill you would not have owed otherwise. Have an attorney review the terms before you sign.
Short Sale with Deed in Lieu Backup
Pursue a short sale with a deed in lieu maintained as a fallback. This is for homeowners who want to avoid foreclosure but may have trouble selling due to condition, valuation, disrepair, or running out of money.
You keep two paths open at once. If the short sale succeeds, you exit cleanly. If it stalls, the deed in lieu is already in motion and you avoid an actual foreclosure on your record.
Strategic Default (Managed)
Rather than letting the bank run the show, work with an attorney to exit on the best terms possible, leveraging California law, disputing the debt where appropriate, and managing the default strategically rather than passively.
A strategic default is not simply walking away. It is a managed process that uses California's anti deficiency laws, the foreclosure timeline, and attorney negotiation to protect your money, your taxes, and your credit as much as the facts allow.
Why the Approval Letter Matters Most Now
Because the Mortgage Debt Forgiveness Act has expired, the bank will send the IRS a 1099-C (short sale or deed in lieu) or 1099-A (foreclosure) for the amount they consider themselves short. The IRS will look at that forgiven amount as income unless you find a way to exclude it. The approval letter or final deed in lieu terms control whether you owe that tax. Never sign a poorly drafted approval letter.
Want This Reviewed for Your Situation?
If instead of going through the guide you would like to talk to an attorney, we offer a free consultation. Or continue to the options for homeowners who have received a Notice of Default.
Want This Reviewed for Your Situation?
Every situation is different. Get a free, no-obligation review with John McConnin, California Attorney & Broker.
(858) 324-8855