Procedural Flow of Foreclosure
The debtor has several options when faced with a foreclosure or repossession. The options have varying costs, time limits and consequences associated with them. Be aware that every state has differing rules and procedures for these actions and failure to abide by the rules in that jurisdiction can results in the loss of time, money and rights for both the lender and the debtor.
The debtor may voluntarily surrender a piece of collateral property to the creditor when the threat of foreclosure or repossession is imminent.
For Example: John purchased a new car in Jan 2013. By November 2013 John had lost his job and could no longer make the payments on the car. Instead of letting things drag on, John took the keys and the car back to the lender and turned the car in for resale.
A debtor may also abandon the property, that is voluntarily and permanently give up possession and use of the property with the intention of ending ownership but not actually transferring that ownership to another party.
For Example: John, from the example above, was embarrassed about not being able to pay his car note. So, instead of turning in the car, he simply takes no action, leaves the car parked on the side of the road, and walks away from it.
The final course of action is for the creditor to actually proceed with foreclosure and/or repossession actions while the debtor still has use and possession of the property. If successful, the creditor will add the costs to the loan and the debtor must start making payments on the loan again, but the debtor gets to keep their collateral. If unsuccessful, the debtor has full use of the property until the last minute and it normally costs the same as an abandonment.
For Example: John, again from the example above, decides he’s going to get as much use out of the car as he can and continues to take no action, ignores summons, makes no payments, and continues to drive and use the car. One day, John comes out of his home and the car is gone. It has been repossessed.
If the lender is forced to initiate legal foreclosure proceedings, called a judicial foreclosure, a typical flow of events involves the following:
1. A preliminary title search to determine information on all parties that have an interest in the property.
2. A foreclosure complaint is filed with the court by the lender asking for a judgment to foreclose on the property.
3. All parties with an interest in the property are legally served by the court with notice of the proceedings.
4. A hearing is conducted where all parties present their case before the court.
5. The court issues a ruling.
6. If foreclosure is granted then a notice of sale is published.
7. The sale is held, the new buyer is issued a certificate of sale.
8. The sale is reported to the courts and all parties.
9. The proceeds of the sale are disseminated to the various parties (lender, courts, etc) as indicated by state law.
At the conclusion of the sale the court will either determine who the excess funds, if any, will be distributed to (very unlikely due to fees) or issue a notice of deficiency to the original debtor; if there is still a balance on the original mortgage and the debt was recourse. This allows the lender to continue to attempt to collect the remaining amount of the debt from the debtor. If the debt was non-recourse then the value of the foreclosed property is considered to be total payment for the outstanding balance and the lender may not continue collection actions.
At any point after the notice of default (step 2 yesterday) has been filed with the court the debtor may exercise their right of redemption. This enables the original buyer or related parties to stop the foreclosure proceeding by purchasing the property in full. The specific time frames and fees that can be included in the required right of redemption payment vary from state to state.
There are two type of redemption, equity of redemption and statutory redemption. Equity of redemption is available from the time of the filing of the default until the property is sold at the foreclosure sale. Once the property is sold the equity of redemption right is closed. To use the equity of redemption right the original buyer must pay in full the underlying debt plus all fees, interest, and costs accrued during the foreclosure procedure. This is a right available in all states.
The right of statutory redemption comes into play once the property has been sold to a new buyer at the foreclosure sale. This is a right available in many, but not all states. Each state has differing procedures and time frames for this process. The original buyer will have a set period of time to “purchase back” the property from the new buyer by paying in full the foreclosure sale price plus fees and costs incurred by the new buyer.