Certain creditors may have special rights when faced with collecting bad debts. One of these rights is the availability of a procedure called foreclosure. Foreclosure is most often exercised in relation to unpaid mortgages on real property. In a foreclosure proceeding, the creditor exercises its option under the mortgage to force a sale on the property that is the subject of the mortgage in order to use the proceeds to pay the debt.
The rights of a mortgagee (usually the lender) when the mortgagor (borrower) defaults vary considerably from state to state. There are, however, a number of similarities. Generally, there are only two types of foreclosure sales: a judicial sale and a sale pursuant to a power of sale clause contained in the mortgage documents. Judicial sales still are considered the traditional route of foreclosure. Although the details of judicial sales are mainly a matter of local law, they usually require notice of a hearing, a hearing, a judicial determination of default, notice of sale, a sale, confirmation of a sale, possible redemption and entry of a judgment for any deficiency (the difference between the sale amount and what is owed on the debt).
In order for a mortgagor to avoid a judicial foreclosure once he or she has defaulted in making scheduled payments, the entire debt must be paid. In about half of the states, the period in which the mortgagee can exercise this option, or redeem the debt, extends even beyond actual foreclosure. In that case, the redemption amount is the sale price plus interest, not the amount of the debt secured by the mortgage.
In a judicial foreclosure, the sale is not enforceable by the buyer until it has been confirmed by the court. Legal rules limit the court’s discretion on whether to confirm the sale. Mere inadequacy of price without more is not enough to justify the court’s refusal to confirm a foreclosure sale, but adequacy of price is a primary concern. In many states, the property must be appraised before the foreclosure sale, and the sale will not be confirmed unless the sale price is at least a certain percentage of the appraised value.
Because judicial foreclosures are time-consuming and procedurally complicated, some mortgagees include in their standard mortgages a power-of-sale provision permitting a sale without any judicial intervention if the mortgagor defaults. Not every U.S. state recognizes that type of foreclosure. In the states that do allow it, the sale must be public and preceded by a notice (usually by advertisement) that specifies the amount due, the property description, the date and location of the sale, and whatever other matters the statute and the mortgage specify. Because courts tend to be critical of non-judicial sales, they are quick to grant relief against such sales for even slight irregularities. This reluctance to accept non-judicial sales can result in uncertainty of title, which remains one of the main problems of power-of-sale foreclosures.
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