Illinois is a judicial foreclosure state, meaning foreclosure cases are handled through the court system. The lender files a lawsuit against the borrower and obtains a judgment. As in most judicial foreclosure states, in Illinois it is possible for the lender to obtain a deficiency judgment. 735 Ill. Comp. Stat. 5/15-1508. A deficiency judgment is a judgment lien against a borrower when the foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.
There are two types of deficiency judgments that may be entered against borrowers in Illinois: an in personam deficiency judgment or an in rem deficiency judgment. In personam means that the judgment is against the borrower, and in rem means the judgment is against the property.
The type of deficiency judgment that borrowers need to be concerned about is the in personam deficiency judgment. With an in personam
deficiency judgment, the lender is entitled to collect the monetary
amount from the borrower personally, which they can do by garnishing
wages, bank accounts, taking non-exempt assets, or collecting against
the estate if the borrower is deceased. A deficiency judgment in
Illinois is valid for seven years from the date entered. The only way to
eliminate a deficiency judgment is to file for bankruptcy.
A chapter 7 bankruptcy will completely eliminate the deficiency
judgment, but with a Chapter 13 filing a portion of the debt may have to
be paid. See Bankruptcy & Foreclosure: Mortgage Deficiency Judgments for more detail.
An in rem deficiency judgment has no effect on the borrower personally and is entered as part of the foreclosure judgment in case the borrower chooses to exercise the right of redemption for the property. Redemption is the right of a foreclosed property owner to reclaim the property by paying the entire sale price, plus certain additional costs and interest following the foreclosure sale. If the borrower redeems, the in rem deficiency judgment preserves the lender’s right to a lien on the property for the balance that remains after the redemption amount is paid. 735 Ill. Comp. Stat 5/15-1604.
The deficiency judgment will be entered at the foreclosure sale confirmation hearing following the sheriff’s sale, which occurs at the completion of the foreclosure process. To determine which type of judgment has been entered in an Illinois foreclosure, review the Order Confirming Sale. There will be a paragraph that describes the type of judgment that has been entered and the exact dollar amount of the deficiency.
In Illinois, the lender cannot charge late charges past the date of acceleration as part of the total debt in a foreclosure. The date of acceleration is the date that the breach letter expires, if the breach is not cured. (A breach letter is the letter sent by the lender that informs the borrower that the mortgage payments are late and must be paid by a certain date to avoid foreclosure.) Late charges cannot be assessed against a borrower’s account after the date the breach letter expires. So, if an in personam judgment has been entered, it is worthwhile to verify that the late charges that are included in the deficiency amount are accurate and that you are not being held responsible for more than is allowable by Illinois law.
In Illinois, an in personam deficiency judgment may only be entered when there has been personal service. 735 Ill. Comp. Stat. 5/15-1508[e]. This means that the sheriff or process server must personally serve the borrower. If the process server cannot locate the borrower and cannot serve a copy of the complaint for foreclosure upon the borrower, but rather has to publish notice, then a deficiency judgment cannot be obtained. The exception to this rule is if the borrower makes an appearance in the case, by filing an answer to the complaint, for example. However, it is common for courts in Illinois to refuse to enter a deficiency judgment in foreclosure cases, even if personal service is obtained, due to reasons of fairness, reasonableness, and equity.
Illinois law prohibits a deficiency judgment following a deed in lieu of foreclosure unless the deed in lieu of foreclosure agreement or a contemporaneous agreement states otherwise. 735 Ill. Comp. Stat. 5/15-1401. The agreement would need to specifically state that the borrower agrees to be responsible for a deficiency in a certain amount.
To avoid a deficiency judgment with a short sale, the short sale agreement must expressly state that the lender gives up its rights to the difference between the short sale amount and the total debt. If the lender will not agree to such a provision in the short sale agreement, this does not mean that the lender automatically gets a deficiency judgment. The lender must file a lawsuit to be awarded the deficiency judgment. When contemplating a short sale, borrowers can choose to take the chance that the lender will not bother to file a court action to get a deficiency judgment, even if the short sale agreement does not state that the lender agrees to give up its rights to a deficiency.
The statute that permits deficiency judgments for foreclosures in Illinois is 735 Ill. Comp. Stat. 5/15-1508. The statute addressing a deficiency judgment following a lender’s acceptance of a deed in lieu of foreclosure is 735 Ill. Comp. Stat. 5/15-1401.