Deficiency Judgments in Recourse States: Navigating Dangerous Waters
Unfortunately, the foreclosure crisis in Chicago is far from over. Homeowners
continue to struggle to make payments as the economy remains stagnant.
To add insult to injury, many of these homeowners are underwater - meaning
the amount still owed on their mortgage is more than what the home is
For these underwater homeowners, many believe they can simply walk away
from their mortgage and surrender their home to their lender. But, before
homeowners do this, they had better know if they live in a recourse or
The Basics of a Deficiency Judgment
In a non-recourse state, if an underwater homeowner stops making mortgage
payments and walks away - often known as a
strategic default - the lender is not allowed to come after them for the difference between
the loan balance and the sale price of the foreclosed property.
Conversely, in recourse states such as Illinois, lenders are permitted
to pursue a homeowner if the sale of the house does not cover the entire
amount still owed on the mortgage - known as a deficiency Judgment. In
this proceeding, the homeowner is liable for the remaining balance. Simply
walking away from a mortgage may expose the homeowner to a deficiency judgment.
For example, imagine a couple named Blake and Crystal who have a mortgage
balance of $600,000, but whose home is now only worth $450,000. If Blake
and Crystal were to simply walk away from the loan, and their lender is
only able to sell their home for $450,000, then the lender would be able
to pursue Blake and Crystal for the remaining $150,000.
It is probably wise for Blake and Crystal to discuss their options with
an experienced foreclosure defense attorney before making any rash decisions
in order to avoid deficiency judgment liability.
One such option available to Blake and Crystal is to file for bankruptcy.
A bankruptcy proceeding absolves the debtor from qualifying debt and stops
foreclosures instantly. However, there are many other alternatives to
consider in addition to bankruptcy, including:
An experienced foreclosure defense attorney can discuss the many alternatives
and help determine the best option for each home owner's unique situation.