If your Illinois home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a hefty bill afterward in the form of a deficiency judgment. In this article, you’ll learn what a deficiency judgment is, how the foreclosing bank can get a deficiency judgment against you in Illinois, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
In a foreclosure, the total debt that the borrower owes sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a “deficiency.”
Example. Say the total amount you owe on your mortgage loan—including outstanding principal, interest, fees, and costs—is $300,000. But your home sells for just $250,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the foreclosing bank can seek a personal judgment (called a “deficiency judgment”) against the debtor to recover the deficiency. Generally, once the bank gets a deficiency judgment against you, the bank may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account. (Learn about different ways that creditors use to collect judgments.)
Foreclosures in Illinois are judicial, which means the bank has to go through state court to foreclose. Some other states permit nonjudicial foreclosures, which means the foreclosure happens without court involvement.
To begin the foreclosure, the foreclosing bank files a lawsuit against the borrower—called a “complaint” in Illinois—and, if you don’t file an answer that raises a legitimate defense, obtains a judgment. As part of the foreclosure judgment, the bank may get a deficiency judgment. (735 Ill. Comp. Stat. 5/15-1508).
In Illinois, the bank may obtain an in personam deficiency judgment or an in rem deficiency judgment.
An in personam deficiency judgment entitles the bank 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 bank 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. To learn more about filing for bankruptcy, consider talking to a bankruptcy lawyer.
An in rem deficiency judgment, on the other hand, isn’t a personal judgment. It’s 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 after the foreclosure sale.
What does it mean to redeem the property? Under some states' laws, the homeowner may redeem the home by paying the entire amount owed before or after a foreclosure sale to either stop the foreclosure or reclaim the property following the sale. In Illinois, if the borrower redeems after the foreclosure sale, the in rem deficiency judgment preserves the bank’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 rights in Illinois. In Illinois, the redemption period for residential mortgages is:
Additionally, Illinois provides a 30-day special right to redeem following the date the sale is confirmed if:
A short sale is when you sell your home for less than the total debt you owe, and the proceeds of the sale pay off a portion of the balance. In Illinois, the bank can get a deficiency judgment after a short sale.
To avoid a deficiency judgment, a short sale agreement must expressly state that the bank waives its right to the deficiency. If the short sale agreement doesn’t contain this waiver, the bank may file a lawsuit to get a deficiency judgment. Though, if the bank forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure (deed in lieu) is when a bank 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 fair market value of the property.
In Illinois, a bank 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).
Again, if the debt is forgiven, you might have a tax liability.
If you’re facing a foreclosure and possible deficiency judgment in Illinois, consider talking to a foreclosure lawyer to learn about different options, including loss mitigation options and whether you have any defenses to the foreclosure. For information about alternatives to foreclosure, a HUD-approved housing counselor is also an excellent resource.