In certain circumstances in Illinois, you might owe your mortgage lender money after a foreclosure sale of your home. This is called a deficiency. Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Illinois—and when it can't—and what happens to the deficiency in a short sale or a deed in lieu of foreclosure. (To learn what to do—and what not do—if you’re facing a foreclosure, see Foreclosure Do's and Don'ts.)
In a foreclosure, the total debt the borrower owes sometimes exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a “deficiency,”
Example. Say the total debt owed is $200,000, but the home sells for $150,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment—a deficiency judgment—against the debtor to recover the deficiency. Generally, once a deficiency judgment has been obtained, the lender may collect this amount (in our example, $50,000) from the borrower by doing such things as garnishing the borrower’s wages or levying the borrower’s bank account.
Foreclosures in Illinois are judicial, which means they're administered though the state court system. The lender files a lawsuit against the borrower—called a “complaint” in Illinois—and obtains a judgment. As part of the foreclosure judgment, the lender may obtain a deficiency judgment. (735 Ill. Comp. Stat. 5/15-1508). (Learn the differences between judicial and nonjudicial foreclosures.)
In Illinois, the lender may obtain an in personam deficiency judgment or an in rem deficiency judgment.
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.
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 can 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.
An in rem deficiency judgment, on the other hand, is not a personal judgment. It is a judgment against the property itself. An in rem deficiency judgment is entered as part of the foreclosure judgment and only comes into play if the borrower redeems the property.
What does it mean to redeem the property? Redemption occurs when the foreclosed property owner reclaims the property by paying the entire amount owed, plus certain additional costs and interest. If the borrower redeems, the in rem deficiency judgment preserves the lender’s right to a lien on the property for the debt balance that remains after the owner pays the redemption amount. (735 Ill. Comp. Stat. 5/15-1604[b]).
Redemption in Illinois. 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 three months after the judgment is entered, whichever is later. (735 Ill. Comp. Stat. 5/15-1603[b]).
Additionally, there is a 30-day special right to redeem following the date the sale is confirmed if:
Generally, when a senior lienholder forecloses, any junior liens—these would include second mortgages and HELOCs, among others—are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold-out in this manner, that junior lienholder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans. (Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?)
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
In Illinois, a lender may not obtain a deficiency judgment following a deed in lieu of foreclosure unless the borrower agrees to remain liable by signing such an agreement at the same time as the deed in lieu of foreclosure. (735 Ill. Comp. Stat. 5/15-1401).
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid foreclosure.)
There is no law that precludes a deficiency judgment following a short sale in Illinois. To avoid a deficiency judgment with a short sale, the short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement does not contain this waiver, the lender may file a subsequent lawsuit to obtain a deficiency judgment.
To find the laws pertaining to foreclosures in the state of Illinois, refer to Chapter 735 “Civil Procedure” of the Illinois Compiled Statutes, which can be found on the state legislative webpage.
If you’re facing a foreclosure in Illinois, consider talking to a local foreclosure attorney. A foreclosure attorney can explain different options that might be available to prevent a foreclosure, like a loan modification, forbearance agreement, or repayment plan and let you know if you have any potential defenses to the foreclosure.
If you can’t afford to hire a lawyer, a HUD-approved housing counselor is a good resource for information about different ways to avoid foreclosure.