It is not enough that Cook County homeowners took the brunt of the real estate melt down from 2008 to 2010, they now are being held liable for the shortfalls of property values through deficiency judgments and collections on second mortgages.
A deficiency judgment is the amount owed after a foreclosure is complete and the property does not sell for the amount of the debt. Often, lenders at sheriff or judicial sales will “bid in their debt”, which means that they will bid the same amount as they are owed. If that is the case, then there is no debt owed by the homeowner. That is not always the case, though. Sometimes, lenders will bid an amount equal to the current market value or some other amount that approximates that amount.
If a bid at judicial sale is less than the amount of the debt, there is a deficiency in the amount owed. Until recently, in Cook County, the Courts simply would not enter a deficiency judgment. However, the Illinois Mortgage Foreclosure Law (IMFL) provides that the Court “shall enter a deficiency judgment if it is requested”. The only defenses would be the calculations in the amount owed.
As there are few defenses to a judicial sale, if a deficiency is sought, it will generally be given. Sometimes the deficiency is sought to punish the homeowner for seeking a solution other than foreclosure or vigorously defending a foreclosure. Recently, I was in court and saw a lender’s counsel seek the full balance of debt because the bid at sheriff’s sale was $1000 – on a $300,000+ debt. It was clear to the Judge that “justice was not otherwise done” and without the defendant even appearing, the Judge would not enter an Order against the Defendant until the Plaintiff (Lender) proved that the property had sold for a reasonable value. Unfortunately, there is neither case law nor statute that establishes was “reasonable value” would be.
Just as a homeowner can be held liable for the difference between what is owed and what is bid by the first mortgage, the foreclosure does not in any way protect the borrower from the balance of the second mortgage. Once the foreclosure is complete, it is likely that the second mortgage will not have received any payment and will now sue on the Note.
Homeowners should remember that a judgment can be kept alive for 20 years and the right to sue on a Note is valid for 10 years after the last payment is made on the Note. The mere fact that a lender does not collect on a debt does not mean that they won’t. There are enough Note Buyers out there who will gladly buy the debt for pennies on the dollar and sue or try to collect on the full balance.
What is a homeowner to do?
- File bankruptcy – the sooner you get the debt off of your credit, the sooner you can go about building your credit again.
- Try to settle – if a Note Buyer has purchased the debt, there is a great deal of room for negotiation.
- Keep yourself judgment proof – make it impossible to collect against you.