All mortgage foreclosures in Illinois are subject to a process known as judicial foreclosure. A judicial foreclosure is the process in which a lender goes through formal proceedings to obtain possession of a property after a homeowner falls behind on their mortgage payments. A lender seeking to foreclose on an Illinois property must file a lawsuit, obtain a judgment of foreclosure and sale, conduct a sheriff's sale and have that sale confirmed by the court.
In Illinois, judicial foreclosures are governed by the Illinois Mortgage Foreclosure Law (IMFL). A less well-known provision of the IMFL - which can often be better for the homeowner - is a process called a consent foreclosure.
In a consent foreclosure, a judgment is issued by the court giving the property to the lender, and can be requested once foreclosure proceedings have begun. This process allows the homeowner to consent to the judgment of foreclosure to be entered without having to go through all of the formal foreclosure proceedings.
One of the greatest benefits associated with a consent foreclosure is that in exchange for the consent judgment, the homeowner doesn't face the possibility of a deficiency judgment. With a traditional foreclosure, when a home sells for less than what remains on the mortgage, the homeowner may be held liable for the remaining balance and the lender may obtain a deficiency judgment to collect the remaining balance - which isn't the case in a consent foreclosure.
However, one potential downside to a consent foreclosure is that there may be tax implications resulting from the forgiven debt. For tax purposes, the IRS considers forgiven debt as income. Thus, when a lender forgives a mortgage the home owner may have to pay taxes on the debt forgiven.
In direct response to this issue and the recent housing crisis, Congress enacted the Mortgage Debt Relief Act of 2007. Under this piece of legislation, homeowners generally do not have to report as income mortgage debt that is forgiven - but this Act is set to expire later this year.
Consent Foreclosure and Tax Implications in Real Life
To further illustrate the benefits of an Illinois consent foreclosure, imagine a couple named Blake and Crystal purchased their dream home on lovely Sheridan Road for $600,000, with a $500,000 initial mortgage. Although they could initially afford the mortgage payments every month, Crystal recently lost her job and the payments are beginning to eat away at their savings. As their savings run out, they begin to miss mortgage payments.
Blake and Crystal find an experienced Illinois foreclosure defense attorney to represent them. After discussing and carefully considering their options, they decide to pursue a consent foreclosure. The process does have a negative impact on their credit; however, they will not liable for any deficiency judgment. If the lender is only able to sell the home for $350,000 but Blake and Crystal still owe $400,000 on the mortgage at the time of the consent foreclosure, then they are not liable for the difference. With a traditional foreclosure, the lender may be able to pursue Blake and Crystal for this $50,000 deficiency.
Determining the best financial option is unique for each situation. As a result, if you or a loved one is struggling to make mortgage payments it is wise to seek the counsel of an experienced Illinois foreclosure defense attorney to discuss all your options.