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What exactly is a deficiency judgment, and how can I avoid one?

Homeowners facing foreclosure often believe that the public auction is the end of the process. After all, by the time the auction comes around, the bank has taken possession of the home, and the redemption periods have passed. When the bank sells the home, the borrower is off the hook and can put the whole thing behind him, right?

Wrong. In Illinois, the lender may file for a "deficiency judgment" against the borrower. If the home sold at auction for less than the borrower owed on the mortgage, the lender may sue the borrower for that amount.

Say Sam borrowed $100,000 from Mortgage Lender to purchase his house. After a few years, he lost his job and could not make his monthly payments. Lender filed for foreclosure, and Sam fought it.

The day Lender filed, the clock started ticking on Sam's seven-month "redemption period." Sam was unable to come up with the money to pay off the loan and to cover the bank's foreclosure costs, so the house went up for auction.

At auction, though, the house sold for $75,000. Lender has lost $25,000 of the original loan, and lenders do not like to lose money. Lender can sue Sam to recoup the $25,000 loss, the deficiency.

Sam had a couple of opportunities to bar Lender from pursuing the deficiency judgment. First, he could have chosen not to fight the foreclosure, requesting instead a "consent foreclosure." Sam would have agreed to the foreclosure, sparing Lender  the time and money associated with a full foreclosure; in return for that, Lender would have agreed not to pursue a deficiency. (All of this is subject to the court's approval.)

Sam could also have given Lender "a deed in lieu of foreclosure" before Lender filed the court action. By signing the property over to Lender, Sam could have satisfied the debt and barred Lender from pursuing the deficiency judgment.

This is, of course, a broad explanation. The law can be much more complicated than our hypothetical. That is why we recommend that a homeowner facing foreclosure consult with an attorney to review all of the options available to him.

Source: Foreclosure.com, "Illinois Foreclosure Laws," accessed July 30, 2014

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