Deficiencies and Deficiency Judgments
What Is A Potential Deficiency?
A potential deficiency is the difference between the value of a piece of property and the principal balance of the mortgage loan associated with that property. Given that property values change over time, it is only possible to estimate the amount of a potential deficiency. If a piece of property is worth less than the loan balance, there is a potential deficiency.
If the property is worth more than the loan balance, there is no potential deficiency. This estimate is useful to a homeowner facing foreclosure because it helps identify potential liabilities. A home that is worth less than the loan balance presents a financial risk and may also represent a bad investment. Estimating a potential deficiency allows homeowners to make informed decisions.
For example, if the principal balance on a mortgage loan is $250,000, but the home's current market value is $200,000, then there is a potential deficiency of $50,000.
How Is A Deficiency Calculated?
In Illinois, a deficiency cannot be fully ascertained until a property is sold at a sheriff's sale. Once the sheriff's sale is conducted, the amount of the winning bid is deemed to be the value of the property. This number is then subtracted from the total balance due on the loan. The total balance due on the loan will include fees and penalties incurred before and during the foreclosure lawsuit.
These may include late fees, attorney's fees, property inspection and maintenance fees, hazard insurance fees, and property taxes. This amount will be specified in the judgment of foreclosure and sale. This is also known as the judgment amount. If the judgment amount exceeds the value of the property, then there is a deficiency.
For example, if the judgment amount is $300,000, but the home sells for $150,000 at the sheriff's sale, then the deficiency is $150,000.
What Is A Deficiency Judgment?
Once a deficiency is ascertained after the sheriff's sale of a property, the lender has the option to request that the deficiency amount be reduced to a judgment against the former homeowner. This judgment is entered at the same hearing where the sheriff's sale is confirmed. The judgment is enforceable and collectible just like any other judgment for cash damages. The lender is now known as a judgment creditor. As a judgment creditor, the lender can file a judgment lien against any other property owned by the former homeowner. It can also use the same collections methods as other judgment creditors.
Typically, the collection process will begin with a citation to discover assets. This is a court proceeding where the former homeowner is compelled to appear in court and answer questions under oath about any assets he or she may have. Assets include things like bank accounts, stock portfolios, personal property and other real estate the individual may own.
The judgment creditor may seek a wage garnishment. A wage garnishment is when the judgment creditor is paid a sum of money from each pay check earned by the former homeowner. Because judgments accrue interest at the rate of 9%, it is very rare that a wage garnishment will fully satisfy a judgment, in particular when the judgment amount is very large.
If a former homeowner has significant cash holdings in the bank, the judgment creditor may seek to seize those funds. This is referred to as a non-wage garnishment. Before the funds are released by the bank, the bank will typically freeze the account, which can cause automatic payments to fail and outstanding checks to bounce.
How Can I Avoid A Deficiency Judgment?
There are several ways that Illinois homeowners can avoid a deficiency judgment. The Illinois Mortgage Foreclosure Law provides several options. Homeowners can request a deed in lieu of foreclosure or a consent foreclosure. Both of these options involve the homeowner returning the property to the lender in exchange for the lender's promise to waive any potential deficiency.
Another way to avoid a deficiency judgment is to prevent the property from being foreclosed upon and sold. In Illinois, homeowners have the ability to reinstate or redeem their mortgages. These methods both require the homeowner to come up with a significant sum of money. In order to reinstate a mortgage, the homeowner must pay all of his or her missed payments, as well as any late fees and charges assessed against the loan balance. This right must be exercised within 90 days of being served with a summons.
Homeowners may also redeem their mortgage. Given the current backlog of foreclosure cases, the right to redemption usually expires 90 days after the entry of the judgment of foreclosure and sale. The homeowner must pay the entire loan balance as well as all of the costs and fees associated with the foreclosure process, including attorney's fees.
Another option available to homeowners is to seek a loan modification or other kind of mortgage restructuring. Loan modifications cure the missed payments, and allow the homeowner to continue making mortgage payments. Once a permanent loan modification is approved, the foreclosure lawsuit will be dismissed.
It is also possible to use a Chapter 7 or a Chapter 13 bankruptcy to avoid a deficiency judgment. Call our offices today to explore your options!