Money Judgments when A Home Is Foreclosed (Illinois)

Foreclosure Deficiencies

This is a general outline provided by ROBERT J. ADAMS & ASSOCIATES. Offices in Chicago and Waukegan, Illinois

The primary practice of ROBERT J. ADAMS & ASSOICATES is Chapter 7 and Chapter 13 Bankruptcy.

When you buy a home financed with a mortgage you give the mortgagee two (2) things:

  1. A lien on the home; and
  2. A Promissory Note (I promise to pay the mortgage company a certain amount of money)

What Happens when A Homeowner Loses Their House in Foreclosure

  • The mortgage company gets a money judgment;
  • The home is sold at a sheriff’s sale (more technically a “judicial sale.”)
  • Anyone can bid at these sales;
  • The successful bidder can pay more that i. the judgment amount, ii. the judgment amount; or iii. something less than the judgment amount.

When the successful bidder pays less than the amount of the judgment there is what is called a deficiency. For example: the judgment was for $300,000 and the successful bidder (usually the mortgagee) bid $250,000: there is a deficiency of $50,000.

With few exceptions the homeowner loses his/her/their house and still owes money.

What About Second Mortgages (or Home Equity Loans)?

Usually 2nd mortgage companies do not bid at sheriff’s sales: you owe the full amount of the balance plus continuing interest.

What to Do?

The most practical solution is to file Chapter 7 Bankruptcy. Then you owe nothing.

If you have to file Chapter 13 for some reason the deficiency amount becomes a general unsecured creditor. Most unsecured creditors are paid a small dividend in Chapter 13.

Limitations on Deficiency Judgments

  • FORECLOSURES COMPLETED BEFORE 2014. Most homeowners were protected against deficiencies from 1st mortgagees; but, not 2nd mortgages;
  • You were never served by the mortgagee when it fore closured. They should not get a money judgment.
  • If you had filed Chapter 13 but the mortgagee was able to get of it (with few exceptions) they can’t get a deficiency judgment.
  • In the foreclosure you agreed to the foreclosure judgment and the mortgagee agreed that the judgment was payment in full.
  • The mortgage company decides not to pursue its money judgment. But when they cancel the debt they are required to issue IRS for 1099-C. This becomes a “phantom income” for the amount canceled. You then owe income tax on the amount of the canceled debt. 
  1. To determine if the cancelled debt is taxable or not you can go to the IRS’ website: Topic 431 – Canceled Debt – Is It Taxable or Not?. If you qualify you can fill out IRS form 982.
  2. Even if one has the debt cancelled and you successively avoids the tax man there is a secondary danger: junk debt buyers. Junk debt buyers buy canceled debts for pennies and try to collect the debt. It can be a nightmare.

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