If you lose your home to foreclosure in Illinois, your liability for the mortgage debt might not end when the lender sells your property to a new owner at a foreclosure sale. If the place sells for less than you owe the lender, you just might get stuck with a hefty bill in the form of a deficiency judgment. A "deficiency judgment" is a money judgment for the difference between the foreclosure sale price and the total mortgage debt. The deficiency judgment allows the lender to collect the debt through standard collection methods, like garnishing your wages or levying your bank account.
In some states that use judicial foreclosure procedures, the lender can get a deficiency judgment as part of the foreclosure lawsuit itself. In other places, the lender has to seek a deficiency judgment by filing a separate lawsuit after the foreclosure.
Illinois foreclosures are judicial. The lender files a lawsuit against the borrower and obtains a judgment from the court. In Illinois, the lender can get a deficiency judgment as part of the foreclosure action if:
But courts in Illinois sometimes refuse to enter a deficiency judgment in foreclosure cases, even if personal service is obtained, due to reasons of fairness, reasonableness, and equity.
The two types of deficiency judgments in Illinois are an in personam deficiency judgment and 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 an in personam deficiency judgment. With an in personam deficiency judgment, the lender is entitled to collect the monetary amount from the borrower personally, which it can do by garnishing wages, seizing bank accounts, taking non-exempt assets, or collecting against the estate if the borrower is deceased.
You might be able to eliminate this kind of deficiency judgment by filing for bankruptcy. A Chapter 7 bankruptcy can eliminate the deficiency judgment, but with a Chapter 13, you might have to repay a portion of the debt.
An in rem deficiency judgment generally has no effect on the borrower personally. It's entered as part of the foreclosure judgment in case the borrower chooses to exercise the right of redemption. If the borrower redeems the property after the foreclosure sale, 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. This document will have a paragraph describing the type of judgment and the dollar amount of the deficiency.
In a short sale, the homeowner sells a property for less than is owed on the mortgage. The lender agrees to accept this "short" amount in exchange for releasing the mortgage lien. Unless the lender agrees to add a provision to the short sale agreement that states the transaction fully satisfies the mortgage debt, the lender retains the right to get a deficiency judgment.
But the lender doesn't automatically get a deficiency judgment against the borrower. The lender must file a lawsuit to get the judgment. If you intend to complete a short sale and want to avoid the risk of being sued for the deficiency, ask your lender to include language in your short sale agreement that you won't be liable for any deficiency after the short sale closes.
A deed in lieu of foreclosure is a transaction in which the homeowner deeds the title to the property directly to the lender. In exchange, the lender agrees to release the mortgage lien. In most instances, a deed in lieu will fully satisfy the debt; but a deficiency could happen with this type of transaction. If the deed in lieu documents clearly state that a deficiency exists and the amount, the borrower remains liable for the deficiency. Generally, the deficiency amount is the difference between the home's fair market value and the total mortgage debt. But Illinois law prohibits a deficiency judgment unless the borrower agrees to remain liable by signing an agreement at the same time as the deed in lieu. (735 Ill. Comp. Stat. 5/15-1401). To avoid liability for the deficiency, ask the lender to agree that the transaction completely pays off the debt. Be sure to get this agreement in writing.
With both deeds in lieu and short sales, it's possible to negotiate a reduced deficiency or pay a lump-sum settlement regarding any remaining debt associated with the transaction. Though, you might have tax consequences if the lender forgives all or some of the deficiency. You might also consider filing for bankruptcy. While bankruptcy might not be a good idea if a deficiency is your only debt, eliminating your liability for a deficiency is an additional benefit if you're already considering it.
If you're an Illinois homeowner who's behind in mortgage payments and want to learn whether the lender is likely to seek a deficiency judgment, if you have any defenses to a foreclosure, or need information about different ways to avoid a foreclosure, consider talking to a lawyer. If you can't afford an attorney, a HUD-approved housing counselor can tell you about foreclosure avoidance options.