After a foreclosure in Illinois, may your lender get a deficiency judgment against you?
If you are going through a foreclosure in Illinois, the foreclosure auction may result in a shortfall. (When the foreclosure selling price does not meet the amount of the borrower’s mortgage obligation, the difference is referred to as a “deficiency.”)
If a foreclosure sale results in a shortfall, the lender may obtain a “deficiency judgment” (a personal judgment) against the borrower in most states, including Illinois.
The Process of Foreclosure Sales
If you fail on your mortgage loan, the lender might sell your property via a legal procedure known as “foreclosure” to satisfy the unpaid amount. After the lender has met all of the legal conditions for foreclosure, the last stage in a judicial or nonjudicial foreclosure is the foreclosure sale, in which the house is sold at a public auction to a new owner.
The foreclosing lender makes the initial offer at the auction, known as a “credit bid.” A credit bid provides the lender with credit in the amount of the borrower’s debt. The lender has the option of bidding up to the complete amount of the debt, including foreclosure fees and charges, or bidding less. Because no one else offers, the lender usually makes the highest bid during the auction and becomes the new owner of the property. If the lender purchases the property during the sale and obtains title, the property is termed “real estate owned” (REO).
At foreclosure auctions, lenders often bid less than the whole amount of a borrower’s mortgage obligation.
After a Foreclosure Sale, What Is a “Deficiency Judgment”?
When a lender takes possession of a property via the foreclosure process, and if state law permits it, the lender might pursue a personal judgment against the borrower to collect any deficit. A “deficiency judgment” is a kind of money judgment. As part of the judicial foreclosure procedure in certain jurisdictions, the lender may seek a deficiency judgment. In certain areas, the lender must sue the borrower separately after the foreclosure to get a deficiency judgment.
However, if the selling price is equal to or more than the mortgage debt amount, you are not liable since there is no deficiency—even if the lender is unable to resell the property for the same amount after the foreclosure sale. In fact, if the sale resulted in a surplus of funds, you may be entitled to that additional cash after the foreclosure auction. However, if the residence has any junior liens, such as a second mortgage or HELOC, or if a creditor lodged a judgment lien on the property, those parties get the cash to settle the amount owing. The funds remaining after paying off these obligations then go to the foreclosed homeowner.
Deficiency judgments are sometimes limited by state law.
Deficiency judgements are occasionally subject to limitations under state law. Some jurisdictions limit the amount of a deficiency judgment, such as requiring the borrower to get credit for the home’s fair market value if the foreclosure sale price is less. In other words, while computing the shortfall amount, the property’s fair market value is substituted for the foreclosure sale price.
Other states impose time restrictions for lenders to obtain a deficiency judgment against a borrower, ranging from three months to one year following the foreclosure sale. (Speak with a foreclosure lawyer in your state to learn the time restriction in your state.) And different jurisdictions have different procedural criteria to get a deficit judgment, and other states do not allow deficiency judgments in certain instances, such as after nonjudicial foreclosures.
How Do Lenders Get Deficiency Judgments?
In general, if a lender obtains a deficiency judgment, it may collect the amount (in the case above, $50,000) from the borrower by traditional collection tactics such as wage garnishment or levying a bank account.
Even if your lender obtains a shortfall judgment, you may very certainly discharge your responsibility for a deficiency judgment, along with many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.
After Illinois Foreclosures, Deficiency Judgments
In Illinois, foreclosures are judicial, which means the lender must go via the state court system. The foreclosing lender initiates the foreclosure process by filing a lawsuit (a “complaint”) against the borrower. If you do not respond to the action, the lender will request and almost certainly get a default judgment, allowing it to conduct a foreclosure auction.
However, if you choose to reply to the foreclosure action, the matter will be litigated. The lender may then request that the court award summary judgment. A summary judgment motion requests that the court award judgment in favor of the lender since the key features of the case are undisputed. If the lender wins on summary judgment or you lose at trial, the judge will issue a judgment and order your property auctioned at auction. If the foreclosure sale does not generate enough money to pay off the debt, the lender may be awarded a deficiency judgment. 735 Illinois Comp. Stat. 5/15-1508, 735 Illinois Comp. Stat. 5/15-1511).
The deficit judgment in Illinois might be “in personam” or “in rem.” Here’s what they all signify.
Deficiency Judgments in Personam
A “in personam” deficiency judgment allows the lender to personally collect the shortfall amount from the borrower, which it may accomplish by garnishing wages, levying bank accounts, or seizing nonexempt assets, for example. However, unless the borrower files an appearance in the foreclosure proceeding, a lender may only get an in personam deficiency judgment if it physically served the complaint on the borrower (through a sheriff or process server). 735 Illinois Comp. Stat. 5/15-1508(e)).
Filing for bankruptcy may allow you to avoid accountability for an in personam deficiency judgment. A Chapter 7 bankruptcy will totally eliminate the deficit judgment, however a Chapter 13 bankruptcy may require you to repay some of the obligation. Consider speaking with a bankruptcy lawyer to learn more about filing for bankruptcy.
Deficiency Judgments in Rem
A shortfall judgment rendered “in rem,” on the other hand, is not a personal decision. It is a judgment against the property. This kind of judgment is included in the foreclosure judgment and is only applicable if the borrower redeems the property after the foreclosure sale.
What Does It Mean to Redeem a Property Following a Foreclosure Sale?
Some states’ rules allow a foreclosed homeowner to regain their house by paying the foreclosure selling price (or the whole amount owing) after the foreclosure sale. The redemption time for residential mortgages in Illinois is:
Seven months after the lender serves the complaint on the borrower, either by summons or publication, or the borrower has otherwise surrendered to the court’s jurisdiction, or three months after the judgment is issued, whichever comes first (735 Ill. Comp. Stat. 5/15-1603(b)).
Furthermore, Illinois gives a 30-day special right to redeem once the transaction is certified if:
The purchaser in a home foreclosure auction was the foreclosing lender (or its nominee), and the sale price was less than the total debt (the total debt is the amount of the judgment plus expenses up to the date of redemption). 735 Illinois Comp. Stat. 5/15-1604(a)).
If the borrower redeems after the foreclosure auction in Illinois, the in rem deficiency judgment protects the lender’s claim to a lien on the property for the debt total that remains after the redemption payment is paid (735 Ill. Comp. Stat. 5/15-1604(b)).
Short Sale Deficiency Judgment in Illinois
A “short sale” occurs when you sell your house for less than the entire amount of debt owed, and the profits pay down a part of the remainder. To prevent a deficiency judgment after a short sale, the agreement must indicate explicitly that the lender waives its claim to the shortfall. If this waiver is not included in the short sale agreement, the lender may initiate a lawsuit to get a deficiency judgment. However, if the lender forgives the shortfall, you may be subject to tax repercussions.
In Illinois, a Deficiency Judgment Following a Deed in Lieu of Foreclosure
A “deed in lieu of foreclosure” (deed in lieu) occurs when a lender decides to accept a deed to the property rather than foreclosing to get title to the property. The deficiency amount in a deed in lieu is the difference between the total debt and the fair market value of the property.
In Illinois, a lender cannot get a deficiency judgment after a deed in lieu unless the borrower signs an agreement agreeing to stay due at the same time as the deed in lieu. 735 Illinois Comp. Stat. 5/15-1401).
What Happens to Second Mortgages, Home Equity Lines of Credit, and Other Junior Liens?
When a senior lienholder forecloses, any junior liens, such as second mortgages and HELOCs, are likewise foreclosed, and the junior lienholders lose their security interest in the real estate. Junior lienholders are frequently referred to as “sold-out junior lienholders” in this case. However, this does not imply you do not owe money to junior lienholders.
Assume a junior lienholder, such as a second mortgage lender, is sold out in this fashion, and the profits of the foreclosure sale are insufficient to cover what you owe to that junior lienholder. In such instance, the junior lienholder might sue you personally on the promissory note for the loan. So, if the equity in your property is insufficient to satisfy second and third mortgages, for example, you may face litigation from those lenders to collect the remaining balances.