Bankruptcy protects Homeowners from Deficiency Judgment liens in Illinois

Prevent Deficiency Judgment liens with Bankruptcy in Illinois

In Re: Michael Linane and Sheila Linane, Debtors

Case Law
Case No. 02 B 42557 Chapter 13
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION
291 B.R. 457; 2003 Bankr. LEXIS 230

March 17, 2003, Decided

Facts: Mortgagee X foreclosed the subject collateral. Debtor did not contest the foreclosure proceeding. Meanwhile, debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code on October 30, 2002. On January 22, 2003, the debtor filed a motion to avoid two mortgage deficiency judgment liens held by X, the first obtained on June 10, 2002, totaling $ 58,803.42, and the second obtained on July 12, 2002, totaling $ 25,251.83. The liens in question were obtained following foreclosure sales of nonresidential properties owned by the debtor, and presently encumber the debtor's home residence.

Issue: Whether the deficiency judgment can still be enforced?

Ruling: No. Mortgage deficiency judgments, by their nature and operation, were sufficiently distinct from mortgage foreclosure proceedings to be outside the purview of § 522(f)(2)(C). A deficiency judgment was a legal remedy which, by 735 Ill. Comp. Stat. 5/15-1508(e), was allowed as a relief incidental to a foreclosure. Unquestionably, a deficiency judgment related back to its associated foreclosure proceeding in that the deficiency amount coalesced into a discrete monetary sum when the sale was consummated. The deficiency judgments, as a remedy, were distinct from, and complementary to foreclosures, and arose out of the underlying obligation, not "out of a mortgage foreclosure" as required by § 522(f)(2)(C). As such, the debtors were unhampered by § 522(f)(2)(C) in avoiding the mortgage deficiency liens. Given the objectives of 11 U.S.C.S. § 522(f), Congress could not have intended to grant greater rights to holders of judgment liens from mortgage foreclosures on non-exempt property than other holders of judgment liens on the exempted property. Logic defied any argument in favor of entitling the creditor to special protections against avoidance of its liens.

Lesson Learned: Creditor-mortgagee can always avoid the tedious enforcement of deficiency judgment by making sure that the security of the loan is more than enough to cover not just the total obligation when defaulted but as well as all penalties, charges, fees and legal costs.

Written by Kevin Levonas and Jerry L.