Mortgage foreclosure proceedings vary widely among the states.
- Some states have non-judicial foreclosure proceedings in which a creditor may foreclose a mortgage without going to court.
- Other states have judicial foreclosure proceedings involving an often lengthy and complex court proceeding.
The general concept of foreclosure is that the creditor collects its lien (unpaid debt) by forcing a sale of the debtor’s real property. The creditor keeps the amount of the proceeds of the sale equal to its debt, plus reasonable expenses involved in collecting the debt. Other creditors, if there are any, take their share of the proceeds from the sale. Any remaining proceeds go to the debtor.
Real property is often encumbered by at least one lien. This lien is held by the bank that lent the debtor the purchase money. The bank is usually the creditor having first priority in a foreclosure sale. Priority is the order in which creditors receive proceeds from the sale. For example, Bank X has a first lien on the debtor’s house and creditor Y has a court judgment of $20,000 against the debtor. If Creditor Y enforces its lien to collect the money due by forcing a sale of the debtor’s house, Creditor Y is second in line to receiving the proceeds from the sale. Bank X receives money first. The following example illustrates how this process works.
Assume that the debtor’s house is sold at auction for $150,000 because of Creditor Y’s decision to foreclose on the debtor’s house. Assume further that Bank X has a purchase money lien for $140,000. In that case, Bank X would take $140,000, leaving only $10,000 for all other creditors. If Creditor Y is the only other creditor, then Creditor Y would recover $10,000 of its debt. As a result, the debtor would still owe Creditor Y $10,000.
In some states, the law gives debtors the right to cure the default and the right of redemption.
- The right to cure means that the debtor has the opportunity to pay off the amount of the loan due and avoid the foreclosure action prior to the entry of the final judgment of foreclosure. Often, the amount due will be the full amount of the mortgage because mortgages often contain acceleration clauses. These clauses provide that if one payment is missed, the entire amount of the loan is due.
- The right of redemption means that the debtor has the right to get back the real property after the judgment is entered. This right is exercised by satisfying the judgment plus some costs which is usually full payment of the loan.