Foreclosure Defense – Deficiency Protection I
By Steven A Leahy
Foreclosure is the process necessary for a mortgage lender (i.e. mortgagee) to take possession of a property because the borrower (i.e. mortgagor, homeowner) defaults on a contractual obligation to the mortgage lender, usually a default in payments. In Illinois, Mortgage foreclosures are governed by the Illinois Mortgage Foreclosure Law (IMFL) 735 ILCS 5/15-1101 et seq. (2013).
Illinois is a recourse state. The IMFL allows the public sale of property to pay a debt. If the public sale of the property does not generate enough money to pay off the borrower’s obligation to the mortgage company, the remaining balance is defined as a deficiency. Recourse loans allow the mortgage company to hold the homeowner (borrower) personally liable should the sale result in a deficiency.
If the homeowner is unable, or unwilling, to resolve the foreclosure case through reinstatement, redemption, litigation, loan modification, or Chapter 13 bankruptcy, the homeowner should concentrate on protecting themselves from the deficiency. There are at least six (6) ways to avoid a deficiency: Short Sales, Deed-in-lieu of foreclosure, consent foreclosure, shortened redemption, In rem judgment, & bankruptcy. Because short sales and a deed in lieu are similar transactions, this article will discuss the first two options.
A short sale and a deed-in-lieu require the cooperation of the mortgage company. In both instances, the mortgage company typically conducts an investigation into the finances of the homeowner. That investigation resembles the process of a loan modification. The homeowner is asked to provide, bank statements, pay advices, tax returns, household budget and a hardship letter, along with other financial disclosures. The cooperation of the mortgage company often depends on the outcome of that investigation.
A short sale involves the sale of real estate where the proceeds of the sale fall short of the balance of the debts secured by liens against the property, and the lien holders agree to take less than the balance to release their lien. For example, Homeowner has a balance due the mortgage company of $150,000.00. But the sales price of the property is $110,000.00. Normally, this sale would not close without the homeowner making up the difference. However, in a short sale, the mortgage company agrees to accept the $110,000.00 and releases the lien on the property so the buyer receives a clear title.
A deed-in-lieu of foreclosure is an agreement whereby the mortgage company accepts the deed to the real estate outright instead of seeking a foreclosure judgment and sale. Often, the mortgage company will insist that a short sale be pursued before considering a deed-in-lieu, but not always. Placing the property on the market allows the mortgage company to determine the market value. In addition, should an offer be made on the property, the mortgage company will not have to take possession of the property, but realize the proceeds of the sale much faster than a deed-in-lieu would allow.
Short sales and deeds-in-lieu do not necessarily release the homeowner for the deficiency (the difference between the balance due and the amount the mortgage company accepts, $40,000.00 in our example). So, if you are considering a short sale or deed-in-lieu, read the agreement carefully to make sure you understand the consequences. Also, there may be tax implications to accepting these options, So, keep that in mind when making a decision.
If you are facing foreclosure, you should take action. You need an attorney to help you sort through your options and choose the best remedy. Never hire a firm to help you with your foreclosure unless the firm is experienced in helping homeowners with all the possible remedies, loan modification, short-sales, deed-in-lieu, consent foreclosures, and bankruptcy. Before you do anything, you should give me a call. We can discuss all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.