Q: My mother passed away and left a house with a mortgage. The house has not sold in this market and the value has declined due to foreclosures in the area. The bank is pursuing foreclosure and naming my mother’s heirs as defendants to terminate our interests in the property.

We have few resources and my mother’s estate was exhausted by the cost of repairing and maintaining the property while trying to sell it.

Is it more cost effective to go through foreclosure and add a statement to our credit reports explaining that the mortgage was not ours or should we pursue a deed in lieu of foreclosure?

A: My condolences on your loss.

The key to understanding the foreclosure action by the bank is this: The bank’s action is against the bank’s borrower, your late mother, not you. If your mother was the only borrower on the original loan to the bank, you and your siblings or other heirs should not be personally responsible for the loan. Your mom’s estate is responsible for repaying the mortgage.

If the estate has insufficient funds to pay off the lender, the lender has the ability and right to foreclose on the home. But that foreclosure should not affect your credit history or the credit histories of the other heirs.

The bank shouldn’t have your social security number nor should the bank have any documents from you obligating any of you to repay the loan. In that case, the loss on the loan is taken by the bank and reported against the borrower – your mom.

If you decide to pursue a deed in lieu of foreclosure, you and the other heirs would be relinquishing any right any of you have in the home to the lender. But that documentation should not have anything to do with the original debt taken out by your mother. Once again, the person obligated on the debt was your mother and she bears the loss. In this case, her estate takes the loss on the home.

If title to the home was transferred from the estate to its heirs, the duty to repay the loan fell upon those new owners. However, those new owners shouldn’t have a legal and personal obligation to repay that loan. If the loan goes into default, the lender would foreclose on the home and sell the home to satisfy the debt. The credit history of the current owners of the home should not be affected.

You should make sure that you did not sign any documentation with the lender that may have placed your credit at risk with the lender. If you did not, you and the other heirs shouldn’t have to worry about a negative report on your credit histories.

You and the other heirs shouldn’t be penalized by the current lender when you are placed in a position of owning a property you did not buy and for a loan you did not enter into. While you tried to keep up with the expenses of the home, if you found that it was too much and then couldn’t sell it and failed to make the loan payments, the lender remedy is to foreclose on the property.

For more details, and to make sure you are protected in any dealings with the bank, you may wish to speak to a real estate attorney.

March 13, 2009.