'Deed in lieu' can soften blow of foreclosure

Financially troubled owners who are about to lose their home to foreclosure usually can soften the blow to their credit report by voluntarily giving the deed back to the bank.

Q. My sister is having severe financial problems and hasn't made her mortgage payments in several months. Her lender wants to foreclose, but has given her the option of signing a "deed in lieu of foreclosure," which would allow the lender to take the property back without putting her through the foreclosure process. How does a deed in lieu work? Should she sign one?

A. I'm sorry that your sister is having financial difficulties, and I hope they resolve themselves soon. If the lender won't help her save her home by restructuring the loan, she certainly would be better off signing a deed in lieu than forcing the lender to formally foreclose.

Why? Because when a borrower signs such a deed, he or she voluntarily turns over control of the property to the lender. Although defaulting on the loan will certainly hurt her credit score, it wouldn't do nearly the damage that a forced foreclosure would wreak on her record. Agreeing to sign the deed would also allow both your sister and the bank to avoid the time and money involved in formal court proceedings.

Remember, a foreclosure is probably the worst possible mark that any borrower can put on his or her record. By signing a deed in lieu of foreclosure, your sister will avoid placing an even bleaker mark on her credit report and will greatly improve her chances of getting another loan when she regains her financial footing.

Q. I live in a large townhouse development, and I serve on the homeowners association's board of directors on a volunteer basis. It's a huge job that averages about 60 hours per month. I've recently talked with some of the other directors about having the association pay us a modest fee for our services, and they think it would be a good idea. Can board members be paid for their time? If not, can I at least take a deduction for the time I volunteer to the HOA on my tax return?

A. The Internal Revenue Service will not allow you to take a deduction for the time you spend "volunteering" on your association's board, much like the agency refuses write-offs for the time that other people spend as volunteers for the Salvation Army, a church or their temple.

You may be able to deduct some of your unreimbursed costs involved in running the HOA - such as printing fliers about upcoming meetings from your own computer or traveling to the association's lawyer - but it probably wouldn't yield much in tax savings, and may even flag you for an audit.

Starting to get paid for the hours you and other directors spend to oversee the association is probably OK, provided that the bylaws of your HOA allow it. If the bylaws don't currently permit it, you will likely need to put the idea up for a vote that must be approved by a majority of all the homeowners in your association.

Q. Is it true that Hugh Hefner has put his famous Playboy Mansion in Southern California up for sale?

A. No, but the publishing magnate is selling the mansion he co-owns with his estranged wife, former playmate Kimberley Conrad Hefner, which stands adjacent to his famous Tudor-style manse for $28 million.

The Hefners purchased the second home about 10 years ago, when they legally separated, so the former playmate would have someplace to raise their two sons. The two young men are now college-age, so Kimberley doesn't need the 2.3-acre, 7,300-square-foot estate anymore.

Q. I lost my job in January and started collecting unemployment benefits in the first week of February. Will the fact that I am getting unemployment checks hurt my credit score?

A. No. Credit bureaus don't keep stuff such as unemployment benefits or disability payments on their records, which means the fact that you are getting jobless benefits will not adversely impact your credit score.

Your score should stay the same, or even improve, if you continue making all the payments on your mortgage and other bills.

• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960

© 2009, Cowles Syndicate Inc.