A voluntary foreclosure is a simplified method of turning property over to the creditor by the borrower.
Sometimes it is called a private foreclosure. It is also sometimes called a deed in lieu of foreclosure, although the two might be different things in some states.
There are several benefits to all concerned. Many states allow a deficiency judgment against the borrower after a foreclosure.
In other words, if the auction does not bring enough money to satisfy the debt, the lender can still obtain a judgment against the borrower for the balance due, and then execute on other assets or garnish the debtor’s wages. The voluntary foreclosure removes that possibility, and the creditor accepts the property as payment in full for the debt.
Some states give the former owner the right to buy his or her property back for some time period after a regular foreclosure. This is called a right of redemption. The purchase price is set at the amount of the foreclosure bid, plus interest and some expenses.
A voluntary foreclosure results in the borrower giving up the right of redemption. As a result, the lender can take steps to sell the property immediately, without the market being chilled by outstanding rights of redemption.
Often, if you can work out a deal with the borrower and lender prior to the auction, they will elect to do a voluntary foreclosure.