What is a Deficiency Judgment?

Kelsey Adams: Consent Foreclosure

Kelsey Adams owns an investment property in the Lincoln Park neighborhood of Chicago, Illinois. When he purchased the property, a 4-unit brownstone, he had four tenants who paid their rent on time. As the economic crisis deepened, two of his tenants quit paying their rent, forcing him to default on his mortgage payments. Kelsey also owns his own home, and he was forced to prioritize his income on making the mortgage payments on his primary residence. Both properties are underwater. The investment property is now in foreclosure.

Kelsey's attorney sends a letter to the lender's attorneys requesting a consent foreclosure. Within 45 days, the lender accepts Kelsey's offer and sends a set of stipulations to Kelsey's attorney for Kelsey's signature. The stipulations are agreed-upon facts that establish the statutory requirements for a consent foreclosure. Kelsey executes the stipulations and returns them to the lender's attorney. 45 days later, Kelsey's attorney appears in court when the consent foreclosure judgment is entered.

The judgment vests title to the property in the lender, and Kelsey enjoys the certainty of knowing that he is not liable for any deficiency on the property. He has managed to rid himself of a failed investment and can comfortably make the mortgage payments on his primary residence. Since the property is not Kelsey's primary residence, Kelsey will want to consult with a CPA to determine what, if any, tax liability he may incur. Had the property included Kelsey's primary residence, his potential tax liability would have been waived so long as the consent foreclosure was to be completed before December 31, 2013.

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