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Options for Junior Creditors During Foreclosure

Posted on in Mortgage Foreclosure

Options for Junior Creditors During ForeclosureJunior 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:

  • Appear in court during the foreclosure process;
  • State the value of its lien on the property; and
  • Request receipt of any surplus from the property sale if the court issues a judgment of foreclosure.

Unfortunately, the junior creditor may receive little or no money from the process if there is no surplus from the foreclosure sale or the surplus must be divided amongst multiple creditors. However, a junior creditor cannot wait to see whether there is a surplus before becoming involved in the foreclosure. In a previous case, an Illinois court ruled that a junior creditor had given up its right to surplus funds because it had not participated in the foreclosure case.

Suing for Deficit

Granting foreclosure will eliminate a junior creditor's lien on the property but does not eliminate the promissory note that the debtor signed. The creditor can file a lawsuit for deficiency of payment on the promissory note. If the court rules in favor of the lawsuit, the creditor can use debt collection efforts, such as wage garnishment and freezing bank accounts. In some cases, a previous lien can be attached to another property that the debtor owns.

Contact a Chicago Creditor’s Rights Lawyer

As a junior creditor, you may doubt whether it is worth your time and money to participate in a foreclosure case when there is no certainty that you will receive any compensation at the end of the process. However, not participating may guarantee that you receive nothing for your lien. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can advise you on how to recover money from a secondary property lien. To schedule a consultation, call 312-704-0771.

Source:

http://www.ilga.gov/legislation/ilcs/fulltext.asp?DocName=073500050K15-1512

Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
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