Recently, I had a phone conference with a client whose house in the northwest suburbs was nearing the end of a strategic default. He stopped paying the mortgage about a year ago due to a divorce and the fact that the property was $100k+ underwater.
The sheriff’s sale was already done and he wanted me to review the order entered in court that confirmed the sheriff’s sale.
I almost spit out my morning coffee as I read this part of it:
“That there be entered an in personam deficiency judgment in the amount of $136,000 against the Defendants _____________, with interest as provided in Section 1508 (e) of the Mortgage Foreclosure Act.”
This meant that the lender, Harris Bank, went through the cumbersome, seldom used process of obtaining a deficiency judgment against the owners. The chances of this happening very slim, but it is allowed by law.
Usually the order confirming the sheriff’s sale says that a deficiency judgment is entered in rem against the property. Seeing this freaks out the client, but the words in rem are nothing to be concerned about it. The key words in this order that make it white hot are in personam, because when you see that, it means you have been hit with a personal deficiency judgment.
The client only had a few options:
- Pay the lender.
- File a chapter 13 bankruptcy (he didn’t qualify for a chapter 7).
- File a motion to vacate the judgment and try to work something out with Harris.
I’ve written before about deficiency judgments and how they are extremely rare except when the bank is a small local lender or if the loan was a commercial loan (used to by an investment property).
This does not mean that the world is ending and everyone will now have a deficiency judgment entered against them. Anyone who has a mortgage with Chase, Bank of America, Wells Fargo, US Bank, Nationstar and the rest of the herd of residential lenders has a slim chance of having a deficiency entered against them. If you have a first mortgage with Harris Bank, I would be very cautious.
To me, this reinforces a couple of things:
- It is almost always a good idea to try a short sale first before moving to a strategic default. Why? Because if the short sale closes, we can usually get a full release of deficiency from the lender, cutting off all liability to the lender.
- Deficiency judgments can’t be entered unless the defendant is personally served with the summons at the start of the case. If you are served by publication, no deficiency judgment can be entered. Clients have to be aware of the implication of being personally served with the summons and proceed accordingly.
- Filing bankruptcy is your final line of defense. If you have a high income, it is likely that you will have to pay the lender back some or all of the judgment, but if you qualify for a chapter 7, you will not have to pay anything to the lender.
Deficiency judgments in Illinois are still very rare, but they are allowed by law and lightning can strike.
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