If you go through a foreclosure in Illinois, the foreclosure auction could result in a deficiency. (When the foreclosure sale price doesn't cover the balance of the borrower's mortgage debt, the difference between the total debt and the sale price is called 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.
If you default on your mortgage loan, the lender can go through a specific legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all of 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, which is a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. 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. If the lender buys the property at the sale and gets title to the home, the property is considered "real estate owned" (REO).
Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.
When the lender gains ownership of a property through the foreclosure process, and 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." 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.
But if the sale price is equal to, or more than, the mortgage debt amount, you're off the hook because no deficiency exists—even if the lender can't resell the property for the same amount after the foreclosure sale. In fact, 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 if 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 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. That is, the property's fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.
Other states limit 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. (To find out the time limit in your state, talk to a foreclosure lawyer.) And various states require specific procedural requirements to get a deficiency judgment, while specific some don't allow deficiency judgments in certain circumstances, like after nonjudicial foreclosures.
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 can probably eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.
Even if your lender has the right under state law to go after you for a deficiency judgment, it might decide not to do so—especially if you don't have many assets to satisfy the judgment. The lender might decide it isn't worth the expense and effort of getting a deficiency judgment.
Still, you should know whether your lender can potentially pursue you for a deficiency after a foreclosure. Also, even if the lender decides not to sue you for a deficiency judgment, it could later sell the debt to a debt buyer who might file a lawsuit against you for the deficiency later on.
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, which will allow 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 the 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.
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. 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. 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.
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:
Additionally, Illinois provides a 30-day special right to redeem following the date the sale is confirmed if:
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 debt balance that remains after the owner pays the redemption amount. (735 Ill. Comp. Stat. § 5/15-1604(b)).
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. To avoid a deficiency judgment after a short sale, the agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement doesn't contain this waiver, the lender may file a lawsuit to get a deficiency judgment. Though, if the lender forgives the deficiency, you might face tax consequences.
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).
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.
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.
It's also a good idea to talk to a HUD-approved housing counselor if you want to learn about different loss mitigation options. 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, which is open 24 hours a day, seven days a week, at 888-995-HOPE (4673).