Junior creditors are at a disadvantage when senior creditors decide to foreclose on a debtor’s mortgage. The senior creditor has priority in the foreclosure sale, and the junior creditor may receive little or no compensation for what the debtor owes it because its debt is often unsecured. A junior creditor can be:

• A lender that gave a second mortgage to the debtor with the property as collateral; or
• A party that received a judgment lien against the debtor’s property as the result of winning a lawsuit against the debtor.

A junior creditor can put itself in a position to receive some compensation from a foreclosure by participating in the foreclosure process. It may also file a lawsuit against the debtor to collect money still owed from its lien.

Sale Surplus

A junior creditor may claim the surplus from a foreclosure sale as long as it establishes its lien on the foreclosed property during the process. This requires the junior creditor to:

A mortgagor can complete a foreclosure and sale of a property, all without hearing a word from the mortgagee who is living at the property. However, the mortgagee may object to the foreclosure sale at the last minute, claiming that he or she never received notice of the foreclosure. This may be a delaying tactic or a desperate attempt to hold onto a property. The mortgagee has the burden of proving that the mortgagor failed to properly serve notice of the foreclosure.

Service Methods

A mortgagor tries to directly serve the foreclosure notice to the mortgagee, who confirms receipt with his or her signature. The mortgagor has alternative methods of service when the mortgagee cannot be found, including:

• Leaving it with someone who lives with the mortgagee at the property;
• Mailing it to the last-known address of the mortgagee; or
• Publishing it in a newspaper that the mortgagee is likely to read.

Leaving a foreclosure notice with another party is called substitute service. The server must record the name of the person being served, a physical description, and his or her relationship to the mortgagee. The mortgagor usually follows up a substitute service by mailing the notice to the mortgagee.

The Chicago area leads the nation in homeowners who are underwater on their mortgages, according to a recent study. Home values in the area have not recovered as much from the 2008 housing market crash as other metropolitan areas. Underwater homes are problematic for creditors trying to collect from mortgagees because:

• Mortgagees may walk away from their homes and their mortgage payments because they have no home equity; and
• Mortgagers may not recuperate the value of the mortgage in a sale if the home’s value is worth less than what the mortgagee owed.

Your mortgagee may ask for you to accept a short sale if he or she cannot afford payments and is underwater on the home. You should be skeptical about approving a short sale because you are forgiving the mortgagee’s debt after allowing him or her to sell the home for less than the value of what he or she owes. However, foreclosure or the mortgagee abandoning the home can also be costly. When a mortgagee suggests a short sale, you should weigh several factors before making a decision:

1. The Cost of a Foreclosure: Foreclosure often takes longer than a short sale and involves more legal fees. There is also no guarantee how much money you will receive in the foreclosure if the property value is low and the mortgagee is incapable of paying the deficiency.
2. Property Condition: The mortgagee has an incentive to maintain the home during a short sale to make it attractive to potential buyers. A property can fall into disrepair if the mortgagee abandons the home or knows that he or she will lose it to foreclosure. You will need to pay for repairs and upkeep on the home before you sell it again.
3. Asking Price: You should assess the value of the home and determine whether the mortgagee is requesting enough money in the short sale. You can reject the sale if you believe you could receive more money by selling the property after foreclosure.
4. Mortgagee’s Finances: You should accept a short sale only if you are satisfied that the mortgagee cannot afford the mortgage payments. The mortgagee may have multiple debts, limited assets, and a diminished income. However, the mortgagee should not use the short sale to get out of a debt that he or she is capable of paying.

Mortgage Options

In most cases, foreclosure is the best way to recuperate the money owed to you on a mortgage. You can receive a deficiency judgment against the mortgagee if the sale price of the home is less than what was owed to you. A Chicago debt collection attorney at Walinski & Associates, P.C., can advise you on how to use foreclosure in your case. To schedule a consultation, call 312-704-0771.

An assignment of rents clause in a mortgage agreement can be helpful when the borrower collects rent from tenants on its property. With the clause, the mortgagee may be able to collect rent payments directly if the borrower defaults on the mortgage. However, it can be difficult to predict how the clause will work in practice because of the vagueness of the law and inconsistencies between different state’s laws. Mortgagees with borrowers in Illinois have used litigation to enforce the clause. U.S. district courts have interpreted Illinois’ law on the assignment of rents to allow the mortgagee to collect rent when it meets certain requirements.

Property Possession

Establishing the possession of a rental property is the clearest way for a mortgagee to assert the assignment of rents clause in a mortgage. The mortgagee can claim actual possession of the property or constructive possession, which means the mortgagee effectively controls the property. In order to take possession of a real property during foreclosure:

The Federal Housing Administration, through the Department of Housing and Urban Development, offers protected loans to help lower income borrowers obtain mortgages. The FHA insures the loan, which gives the lender greater certainty that it will be compensated in case of default. As part of the FHA insurance, the lender must follow federal guidelines in contacting borrowers when they default on the mortgage. Failure to document compliance can halt foreclosure efforts on the property.

In-Person Meeting

According to the Code of Federal Regulations, the lender must have or attempt to have a face-to-face meeting with the borrower before the borrower has missed three months of required payments. If the lender does not have the meeting, it must show that it made a reasonable effort to contact the borrower, including: