If you are in trouble with your mortgage company, and will not be able to make your payment because your payment has went up by 578.00, you ask the company for help and they suggest short sale or deed and lieu. What does that mean and how do you procees at this point.

Do you just turn over your keys and walk out?

The payment has never been late,or missed a payment in over 5years.

A short sale is when the bank allows you to sell the property for less than the balance of the mortgage. They then "forgive" the difference. By doing so, the difference becomes a gift to you that will represent taxable income for the next year.

A deed in lieu is when you turn ownership to the lender. In such a case, they may allow you to walk away without any further liability, or they may sell it themselves and again "forgive" any shortfall.

This is just an addition to Scottgem's fine answer. The "Mortgage Forgiveness Debt Relief Act of 2007", MAY eliminate the tax liability in the case of a mortgage on a primary residence, which was used to purchase or improve the property. A website that I visited mentioned that the borrower must be insolvent at the time of foreclosure to get relief under this act. You should consult with a tax expert to determine its effect on your situation.:)