Robert J. Adams and Associates
What About Money Judgements Following Foreclosure In Illinois?
When one obtains a mortgage loan the borrower (like a homeowner) gives the lender both a lien on the property and a promissory note. When a lender successfully obtains a foreclosure judgment it includes a debt of the borrower for a sum certain.
What happens after a foreclosure sale when the home does not sell for enough money to pay off the mortgage? Mortgage companies can collect the remaining balance, and this leaves people owing tens of thousands of dollars after they have already lost their homes.
Homeowner Protection Gone
Prior to 2014 there was a federal law in place that protected almost all homeowner. First mortgage lenders of homeowners could not obtain a deficiency judgment. That law expired and Congress has not seen fit to renew it.
Now when a mortgage company sells the property for less than the judgment balance they can obtain a deficiency. Here’s a typical example: the mortgage balance is $200,000 but the amount of the sale is $150,000-the now former property owners are liable for the deficiency of $50,000.
The homeowner or property owner is subject to a possible deficiency if the owner has been personally serviced with the summons; or if the summons was served by publication and the foreclosure defendant has filed an appearance and/or pleading.
There is a rare exception: a non-recourse loan. This type of loan is seldom seen for residences but some investment or business properties have these types of loans where the borrower has no personal liability.
Sometimes the mortgagee for its own reasons does not wish to pursue a deficiency judgment. In such instance they cancel the debt. But, then they are required to issue an IRS form 1099-C making the property owners liable for a large income tax debt. For example a $50,000 debt is cancelled the IRS considers this a $50,000 added income in the year it was cancelled. Now you owe the IRS money.
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.
Even if one has the debt cancelled and 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.
What Can You Do If Faced With A Deficiency?
Although you can try and negotiate the amount and payment terms of the deficiency, most people do not have the funds to pay even a portion of the thousands still owed. Homeowners and other property owners often have to file bankruptcy. Chapter 7 bankruptcy discharges the debt so the person who lost their house does not have to pay anything further. Even if the Chapter 7 was filed before the foreclosure took place, the debt remains discharged as long the homeowner did not reaffirm the mortgage debt. This is probably the best option to avoid any money judgment.
The deficiency balance can also be avoided in a Chapter 13 bankruptcy on the following conditions: one, the confirmed plan “surrenders” the property in full satisfaction of the loan; or, two, the automatic stay was modified during the Chapter 13 allowing the mortgage company to complete the foreclosure but without any possible deficiency judgment.
Both types of bankruptcies stop court proceedings to collect on a deficiency no matter how far along it is. If a mortgage company is just starting to sue for a deficiency or is about to get a judgment and garnish the borrower’s paychecks, bankruptcy can get the borrower fast relief. No more court notices. No more garnishments. No more frozen bank accounts.
If you are in a foreclosure or facing the possibility of foreclosure, please call us. Our consultations are confidential.
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