Foreclosures and Subsequent Deficiency Judgments Cause Big Problems For Cash-Strapped Homeowners
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
A foreclosure action allows your lender to take your home and sell it at auction to pay off the balance remaining on your mortgage.
If the amount recouped in the sale isn't enough to pay off your mortgage, then the law allows the lender to sue you and get a "deficiency judgment." The difference between the amount of money owed on your mortgage and the amount received in the sale is the amount that is "deficient," which is the amount you still owe.
Here are often-asked questions about deficiency judgments:
How does a deficiency judgment work?
Let's say you owe $150,000 on your mortgage and the bank forecloses on your home. Then the bank sells your home at a foreclosure auction. If the lender gets only $110,000 at the auction, then the law allows the lender to sue you for the difference. The lender files a lawsuit against you and, unless you have good defenses, the court will award the lender a deficiency judgment against you for $40,000 plus all other costs that the lender incurred.
When does the lender get a deficiency judgment?
In most cases, when the foreclosure action is filed, the request for a deficiency judgment is part of the foreclosure complaint. So when the foreclosure auction is complete, and the sale amount is known, then the court holds a sale confirmation hearing, at which time the deficiency judgment is entered against you.
How do I learn about a deficiency judgment?
Many lenders try to serve notice of the deficiency judgment by publishing it in the legal newspaper of record. But this is not enough. The court can enter a deficiency judgment against you if you have been served in person by a process server or if you have filed an appearance in the foreclosure matter.
Will the mortgage lender try to collect the deficiency from me?
If the home was your primary residence -- as opposed to an investment property -- and if the lender is a major bank, then the lender won't likely try to collect on the deficiency judgment. But if the home was an investment or rental property -- or if the mortgage was owned by a small bank -- then the lender will likely pursue you for the amount owed.
What happens if I can't pay the judgment?
A deficiency judgment is no different from any other kind of judgment. After the court enters the judgment against you, then the lender serves you with a citation to discover assets. This requires that you go to court and bring a copy of your tax return and a list of assets. The lender then uses this information to garnish your wages or seize any non-exempt assets to pay the judgment.
What is a non-exempt asset?
The law allows you to keep certain assets, which are "exempt" from judgment. Other assets are not exempt. For example, the judgment holder cannot seize your retirement accounts or life insurance. Also, you are allowed to keep $15,000 equity in your home if you're single, and $30,000 equity if you're married. The laws outlining exempt and non-exempt assets are complicated and if this concerns you, you should contact a bankruptcy and foreclosure lawyer for a detailed discussion.
How can I erase a deficiency judgment?
You can completely eliminate a deficiency judgment by filing for chapter 7 bankruptcy. Or you can eliminate part of the judgment by filing for chapter 13 bankruptcy.
Can I give my non-exempt assets to a relative or friend to keep for me?
The law allows you to give assets to a relative. But if you do this for the purpose of keeping the assets from seizure, then this is called a fraudulent transfer and the court can require that the assets be returned to you. Transfers can pose other problems as well, such as if your relative gets divorced or files for bankruptcy. Make sure you discuss with a qualified lawyer whether and how you can transfer assets.
If the lender does not request a deficiency judgment in the foreclosure paperwork, can the lender sue me after the foreclosure?
Yes. After the foreclosure, the law allows the lender to sue you for the money you owe, just as any other creditor can sue you. However, this does not happen very often, unless the home was an investment property or unless the mortgage is owned by a small lender. Also, some banks turn over foreclosed mortgages to collection agencies and they can file a lawsuit against you.
If I sell my home in a short sale, can the lender still sue me for a deficiency judgment?
Yes. To avoid this problem, your lawyer should negotiate with the lender and get a no-deficiency condition as part of your short sale. If the lender will not agree to a no-deficiency provision, then all you can do is wait to see if the lender seeks a deficiency judgment in the future. This is why you should hire a skilled bankruptcy and foreclosure lawyer to can represent you in a short sale.
Do deficiency judgments have an expiration date?
Yes. A deficiency judgment in Illinois is good for seven years from the date it is entered.
If the lender forgives the debt and gives me a 1099, can it also get a deficiency judgment against me?
In practice, if the lender gives you a 1099, it will not likely go after a deficiency judgment. The law requires that the lender issue a 1099 after a foreclosure or short sale. Giving you the 1099 does not, however, erase the debt. It means only that you must pay taxes on the forgiven debt. Even so, while most lenders don't pursue a deficiency judgment, the law does permit them to do so. If you want to erase both the 1099 income and deficiency judgment, you must file for bankruptcy before the lender issues the 1099. This is yet another reason to contact a skilled lawyer who will make sure you're protected from the lender.
This information is provided as a service by Richard Fonfrias to assist those facing serious financial problems to better understand all their options. For foreclosure help in the Chicago area, call Richard Fonfrias of the Fonfrias Law Group, a highly experience Illinois bankruptcy attorney who has helped thousands of clients successfully regain control of their financial future. Rich specializes in bankruptcies and foreclosures in Chicago, as well as debt management, debit consolidation, mortgage modifications and tax defense.