Deficiency Judgments

Believe it or not a homeowner can lose their home through foreclosure and still owe money to their mortgage Lender. This article describes how to avoid a deficiency judgment if one loses their home through the legal process.

2008 experienced an implosion of the subprime credit market, a precipitous drop in real estate values, tightening of credit standards for people seeking mortgages, the beginnings of a prolonged recession and rising unemployment. These conditions have caused an increase in the number of foreclosures. In a real estate market that is showing little life some homeowners will try to avoid foreclosure by selling their home for less than what they owe to the lender, this is a short sale.

Unfortunately after losing their home in foreclosure or a short sale, a consumer may still owe money to their original lender. When a home sells for less than the borrower owes, the lender can sue the borrower in state court for the difference between the sales price and the amount owed on the mortgage. The state court can order a judgment on the difference called a deficiency judgment. Further lawsuits can force the consumer to pay the deficiency judgment from their other assets or wages. So how can a borrower about to lose their home avoid a deficiency judgment?

Some states have anti-deficiency statutes such as California, while other states such as Illinois do not. There are however, provisions in the Illinois statutes and Federal Bankruptcy Code that allow a borrower to avoid deficiency judgments.

There are three ways to avoid the deficiency judgment. First way of avoiding a deficiency judgment is to enter an agreement with the lender called a deed in lieu of foreclosure. Simply put, the lender agrees to forego the long and expensive process of foreclosure and they get the deed to your property in return. A deed in lieu of foreclosure relieves borrowers and guarantors of a deficiency judgment unless the deed-in-lieu agreement or a contemporaneous document says otherwise. (735 ILCS 5/15-1401)

Second way to sidestep the prolonged foreclosure process and avoid a deficiency judgment is through a consent foreclosure. Here a borrower agrees to allow an abbreviated foreclosure. The lender submits a motion to the court stating that the borrower will not contest the foreclosure and the court grants the foreclosure without further litigating. In a consent foreclosure, the court grants immediate title to the lender and in return the lender waives the right to a deficiency judgment. (735 ILCS 5/15-1402)

A third way to eliminate the possibility of a deficiency judgment is through a Chapter 7 Bankruptcy. When a Chapter 7 Bankruptcy is discharged, the borrower is protected from the personal liability of a deficiency judgment. Johnson V. Home State Bank, 501 U.S. 78, 82 (1991).

The previous article offers general advice but should never be substituted for seeking the advice of a qualified Attorney at Law who practices in the state where you live.

Illinois law does not expressly prohibit deficiency judgments. An Illinois mortgage borrower can avoid a deficiency judgment by giving their lender a deed in lieu of foreclosure or entering into a consent foreclosure with the lender, or Filing for a Chapter 7 Bankruptcy.