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Who Collects Foreclosure Surplus?

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Posted On: 02/11/2015

QUESTION:

When my home was foreclosed in 2008 it sold at auction and fetched more than the mortgage debt. Can I recoup any of that surplus?

ANSWER:

The loss of a home is a terrible event, often the end result of a job loss, the death of a spouse, a car accident or medical costs. And yet, perhaps oddly, the foreclosure process is supposed to protect the mortgage borrower.

“In every state,” says the Legal Information Institute, a part of the Cornell University Law School, “if the property sells for more than the mortgagor’s unpaid debt, the mortgagor gets the difference.”

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In other words, if you owe $150,000 and the property sells for $175,000 there appears to be a $25,000 surplus. That money, it would seem, should be returned to the borrower under the general rule.

But – as with all things related to real estate and mortgages – not so fast. The foreclosure process in and of itself has costs, and those expenses are the responsibility of the mortgage borrower.

Before the actual foreclosure action you no doubt received a bunch of letters from the loan servicer and, ultimately, a law firm. Those missives aren’t free. They create processing charges and legal fees, costs that are added to the bill.

Was there a court hearing? Several court hearings? Was the auction advertised? Guess who is paying the advertising charges, plus the legal fees?

Notice that the borrower is responsible for paying the bills but does not get to shop around for services. This leads to complications. For instance, one real estate attorney who handles many foreclosures is obligated to advertise various notices. He can put the ads in any of several media outlets and chooses the least expensive, meaning that a printed ad costs about $400 rather than $1,600. This saves the borrower money. Another attorney might choose the $1,600 ads on the basis that a bigger newspaper will reach more potential bidders. In either case, it’s not the borrower’s call.

You can see where this is going: You owe the mortgage debt in addition to all costs associated with the foreclosure. Depending on the state where the property is located and the complexity of the foreclosure the ultimate tab for the borrower can be far more than just the mortgage debt.

When you read about foreclosures that run on for several years, cases where auctions are postponed and multiple hearings are held, just remember that every delay is setting off a new round of charges.

With regard to a foreclosure auction held in 2008, there’s another question to be raised: How long do you have to press a claim against your lender? Your auction was held roughly seven years ago – can you still collect? For details and specifics ask an attorney in the jurisdiction where the property was sold.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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