Deficiency Judgment Laws in Illinois

If you go through a foreclosure in Illinois, the foreclosure auction could result in a deficiency. In most states, including Illinois, if a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" (a personal judgment) against the borrower for the deficiency amount.

What Is a Deficiency in a Foreclosure?

When the foreclosure sale price doesn't cover the borrower's mortgage debt balance, the difference between the total debt and the sale price is called a "deficiency."

Example of a Mortgage Deficiency

If you default on your mortgage loan, the lender can go through a legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all the legal requirements for foreclosure, the final step in a judicial or nonjudicial foreclosure is the foreclosure sale, where the home is sold to a new owner at a public auction.

The foreclosing lender submits the first bid at the sale, a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. Most of the time, the lender makes the highest bid at the sale and becomes the new owner of the property because no one else bids. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.

Again, the difference between the total debt and a lesser bid is the deficiency. For example, if your total mortgage debt is $500,000, but the home sells to the lender at a foreclosure sale for a credit bid of $450,000, the deficiency is $50,000.

What Is a "Deficiency Judgment" After a Foreclosure Sale?

If state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency if one exists. This kind of money judgment is called a "deficiency judgment."

How Does the Lender Get a Deficiency Judgment?

In some states, the lender may ask for a deficiency judgment as part of a judicial foreclosure process. In other states, the lender has to file a separate lawsuit against the borrower after the foreclosure to get a deficiency judgment.

Do All Foreclosures Result in a Deficiency Judgment?

If the sale price equals or exceeds the mortgage debt amount, you're off the hook for a deficiency judgment because no deficiency exists. And if the sale results in excess proceeds, you might be entitled to that extra money following the foreclosure auction.

But if any junior liens were on the home, like a second mortgage or HELOC, or a creditor recorded a judgment lien against the property, those parties get the funds to satisfy the amount they're owed. Then, any proceeds left over after paying off these liens belong to the foreclosed homeowner.

State Law Sometimes Limits Deficiency Judgments

State law sometimes imposes limits on deficiency judgments. Some states restrict deficiency judgment amounts, such as by requiring that the borrower get credit for the home's fair market value if the foreclosure sale price is less. The property's fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.

Other states set time limits for how long lenders get to seek a deficiency judgment against a borrower, typically ranging from three months to one year after the foreclosure sale. (Talk to a foreclosure lawyer to determine the deadline in your case.)

Various states require specific procedural requirements to get a deficiency judgment, while some don't allow deficiency judgments in certain circumstances, like after nonjudicial foreclosures.

How Lenders Collect Deficiency Judgments

Generally, once a lender gets a deficiency judgment, it may collect this amount (in the example above, $50,000) from the borrower using regular collection methods, like garnishing wages or levying a bank account.

Even if your lender gets a deficiency judgment, you might be able to eliminate your liability for it, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.

What Are the Legal Requirements for a Deficiency Judgment in Illinois?

Foreclosures in Illinois are judicial, which means the lender must foreclose through the state court system. To begin the foreclosure, the foreclosing lender files a lawsuit (a "complaint") against the borrower. If you don't answer the suit, the lender will ask the court for, and probably receive, a default judgment, allowing it to hold a foreclosure sale.

But if you choose to respond to the foreclosure lawsuit, the case will go through the litigation process. The lender might then ask the court to grant summary judgment. A summary judgment motion asks that the court grant judgment in favor of the lender because there's no dispute about the critical aspects of the case. If the court grants summary judgment for the lender—or you lose at trial—the judge will enter a judgment and order your home sold at auction.

As part of an Illinois foreclosure, if the sale fails to bring in enough money to pay off the debt, the lender may get a deficiency judgment. (735 Ill. Comp. Stat. § 5/15-1508, 735 Ill. Comp. Stat. § 5/15-1511).

In Illinois, the deficiency judgment can be "in personam" or "in rem." Here's what those terms mean.

In Personam Deficiency Judgments in Illinois

An in personam deficiency judgment entitles the lender to collect the deficiency amount from the borrower personally, which it can do by garnishing wages, levying bank accounts, or taking nonexempt assets, for example. But a lender may only obtain an in personam deficiency judgment if it personally served the complaint on the borrower (through a sheriff or process server) unless the borrower enters an appearance in the foreclosure action. (735 Ill. Comp. Stat. § 5/15-1508(e)).

You might be able to escape liability for an in personam deficiency judgment by filing for bankruptcy. A Chapter 7 bankruptcy will discharge the deficiency judgment completely, but with a Chapter 13 bankruptcy, you might have to repay part of the debt. Consider talking to a bankruptcy lawyer to learn more about filing for bankruptcy.

In Rem Deficiency Judgments in Illinois

An in rem deficiency judgment, on the other hand, isn't a personal judgment. It's a judgment against the property. This kind of judgment is entered as part of the foreclosure judgment and only comes into play if the borrower redeems the property after the foreclosure sale.

Redeeming Your Home After an Illinois Foreclosure Sale

Under some states' laws, a foreclosed homeowner may redeem the home by paying the foreclosure sale price (or the entire amount owed) after the foreclosure sale and reclaim the property.

In Illinois, the redemption period for residential mortgages is:

• seven months after the date that the lender serves the complaint on the borrower, either by summons or publication, or the borrower has otherwise submitted to the jurisdiction of the court, or
• three months after the judgment is entered, whichever is later. (735 Ill. Comp. Stat. § 5/15-1603(b)).

Additionally, Illinois provides a 30-day special right to redeem following the date the sale is confirmed if:

• the purchaser at the foreclosure sale of residential property 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 Ill. Comp. Stat. § 5/15-1604(a)).

In Illinois, if the borrower redeems after the foreclosure sale, the in rem deficiency judgment preserves the lender's right to a lien on the property for the remaining debt balance after the owner pays the redemption amount. (735 Ill. Comp. Stat. § 5/15-1604(b)).

Can You Avoid a Deficiency Judgment in Illinois?

Again, if you lose your home to foreclosure and the court orders you to pay a deficiency judgment, you might be able to use bankruptcy to eliminate the debt. Or you might have a defense to the deficiency, such as you weren't personally served the summons and complaint and didn't appear in the action.

Deficiency Judgment After a Short Sale in Illinois

A "short sale" is when you sell your home for less than the total debt you owe, and the sale proceeds pay off a portion of the balance. To avoid a deficiency judgment after a short sale, the agreement must expressly state that the lender waives its right to the deficiency. The lender may sue for a deficiency judgment if the short sale agreement doesn't contain a waiver.

However, if the lender forgives the deficiency, you might face tax consequences.

Deficiency Judgment After a Deed in Lieu of Foreclosure in Illinois

A "deed in lieu of foreclosure" (deed in lieu) is when a lender agrees to accept a deed to the property instead of foreclosing to get the property's title. With a deed in lieu, the deficiency amount is the difference between the total debt and the property's fair market value.

In Illinois, a lender can't get a deficiency judgment following a deed in lieu 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).

What Happens to Second Mortgages, HELOCs, and Other Junior Liens?

Generally, when a senior lienholder forecloses, any junior liens—like second mortgages and HELOCs, among others—are also foreclosed, and those junior lienholders lose their security interest in the real estate. In this situation, junior lienholders are sometimes called "sold-out junior lienholders." But that doesn't mean that you don't still owe money to junior lienholders.

Suppose a junior lienholder, like a second mortgage lender, is sold out in this manner, and the foreclosure sale proceeds weren't sufficient to pay what you owe to that junior lienholder. In that case, the junior lienholder could sue you personally on the loan's promissory note.

So, if the equity in your home doesn't cover second and third mortgages, for example, you might face lawsuits from those lenders to collect the balance of those loans.

Getting Foreclosure Help in Illinois

If you have questions about Illinois's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.

Talking to a HUD-approved housing counselor about different loss mitigation options is also a good idea. You can use the Consumer Financial Protection Bureau's Find a Counselor tool to get a list of HUD-approved housing counseling agencies in your area. You can also call the Homeownership Preservation Foundation (HOPE) Hotline, open 24 hours a day, seven days a week, at 888-995-HOPE (4673).