Monthly Archives: January 2014

RIP: Illinois short sales

The year 2014 is here and short sales are the year’s first casualty. They are dead on arrival. Gone, done. The final nails in the coffin were the expiration of the Mortgage Debt Forgiveness Act (MDFA) and the sudden increase in deficiency judgments in Illinois during late 2013.

Now, I recommend short sales to almost no one.  Three reasons you should NOT do a short sale.

  1. Deficiency Judgment may be entered. To get a short sale approved you generally have to be behind on payments. Once you stop making payments and try a short sale, there is a 50% chance that it will close. If it does not close, it will end up being foreclosed and there is a strong possibility that a personal deficiency judgment will be entered against you. Not fun.
  1. You will get a taxable 1099 EVEN if the short sale closes. Many, many short sales do not close and end up as foreclosures. If you are foreclosed upon, there will be a 1099 issued even if the property was your primary residence. The MDFA expires on December 31, 2013 and this means that tax is owed on the 1099 issued after a short sale. Why would you do a short sale if you have a huge tax bill on the back end? Due to the 1099, it makes no sense to do a short sale (unless you are insolvent.
  1. Process is too difficult. I closed a lot of short sales in 2013. We became pretty good at getting some of them approved, but we still lost quite a few. The process is even worse now. Many lenders “service release” a mortgage to a new lender in the middle of a short sale. It seems that the new lender is almost always Bayview Loan Servicing. That means you get to start the short sale over again. Bayview has a crazy process and requires that it “net” 95% of the broker price opinion (BPO) amount. Considering the real estate commission is 6%, how are they supposed to net 95%? The buyer has to agree to pay more than the BPO for the closing to happen. If they net less than that, Bayview requires that the property be listed, which is an online auction site. The chances of closing one of these is slim.

The Chicago Sun Times had a nugget yesterday that 25% of Chicago area homes are deeply underwater. What are these people supposed to do now? With the death of short sales, there are two options: Stay in the home until the value increases or file bankruptcy.


Illinois deficiency judgment update

Deficiency judgments are still being entered in Illinois. Two more clients had judgments of around $50,000.00 each entered in the last two weeks. Oddly, the mainstream media has ignored this, probably because it is a confusing topic.

Before 2013, your chances of having a deficiency judgment entered were slim to none. Half way through 2013, we started to see deficiency judgments entered frequently. My unofficial, unscientific estimate is that there is about a 50% chance of having a deficiency judgment entered against you in an Illinois foreclosure now.

What happens after the deficiency judgment is entered?

In one case, the lender sent a letter asking for payment of about 5% of the judgment amount for a full release. This was a tremendous deal and the client just paid it. I hope that we see a lot of these settlement offers. In several cases, the client has heard nothing from the lender. This does not mean the judgment will just go away.

If a client does not settle, we have to assume that the lenders will place the judgment with a collection attorney and that the client will receive a “citation to discover.” This is served by the sheriff and the client has to go to court to tell what his/her income is and what assets the client owns. The purpose of this is so that the creditor can garnish the wages or take non-exempt assets from the client to pay the judgment So far, I have not had this happen to any client after a deficiency judgment was entered, but that does NOT mean it won’t happen. A judgment is good for 7 years, so time is on the lender’s side.

Can I be arrested due to the deficiency judgment?

No, debtor’s prison, popular in merry olde England, doesn’t exist here. Charles Dickens Dad spent a long time in Marshalsea debtor’s prison, which was the basis for Little Dorrit, a great book/movie. You will not be arrested. The only way that could happen is if you don’t show up to court after you were served a “citation to discover.” The judge has the authority to issue a warrant for your arrest if you are a no-show, so be sure to appear in court.

Will bankruptcy get rid of a deficiency judgment?

Yes, in fact, most clients have filed for chapter 7 to eliminate the deficiency judgment. This knocks out the judgment altogether. The filing fee in a chapter 7 is $306 and attorney’s fees are about $1000.00 so this is a very cost-effective way to solve the problem. If the client has a high income or the assets are over the exemption amount ($4,000.00 of non-IRA assets like checking/savings is exempt, $2400 for a car is exempt) then they have to file a chapter 13, which is more expensive and requires the client to make payments back to the lender over a period of either 3 or 5 years. If payments are completed in a chapter 13, then the judgment is vaporized. Filing a chapter 13 after a deficiency judgment is more involved and expensive than a chapter 7, but it stops collection efforts by the lender and it is the last defense if chapter 7 or a settlement are not possible.

Will I still get a 1099 if a deficiency is entered?

No, you won’t get a 1099. If the lender gets a deficiency judgment, there will be no 1099 (for the difference between the value of the property and what was owed the lender). Note: There WILL be a 1099 if you settle the judgment for less than the face amount without filing bankruptcy.

Will the deficiency judgment hurt my credit?

Yes. Like any other judgment, it will drag down your credit score until it is removed by bankruptcy, payment or settlement.