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KASS: The two types of foreclosures

Q:   What is the difference between a judicial foreclosure and a non-judicial foreclosure? Several years ago, I lent what I then called a friend some money to buy a house, and we put a mortgage on the property. He doesn’t want to pay so I am exploring all options. Thanks. Joanne.

A:       The simplistic answer is that in one, you have to go to court and get a judicial order authorizing the foreclosure, and in the other, a private auction company, or even the local sheriff can conduct the sale.

When someone buys property – whether condo, coop or private home, or even commericial – they sign a large number of documents. The most important one for the lender are the promissory note (I owe you XX) and the deed of trust (or mortgage). A deed of trust conveys the property – in trust – to a third party trustee who, if there is a default, has the authority to sell the property at an auction.

The law differs from state to state. Some states allow lenders to opt for either remedy, while some states only allow judicial foreclosure. For example, I believe that Illinois only allows judicial foreclosures, while California allows both. You can type “does (my state) allow non-judicial foreclosures” on the internet and will get a response.

Interestingly, those states which only allow judicial foreclosures use a mortgage document, while those states allowing non-judicial typically use deeds of trust. In Washington, DC, where I practice law, we allow both, and only once in my career have I ever seen a mortgage; it was prepared by an attorney who practiced in a judicial foreclosure state.

In both situations, however, there are strict procedures to follow. The borrower must be given notice and ample time to cure the default. The lender must have real proof that notice was sent. An announcement of the pending foreclosure must be placed in a local newspaper of general circulation and run for a set number of days and weeks. Years ago, especially in New York, some attorneys practiced what was called “sewer service”; instead of physically serving a potential defendant, they put the legal documents in the   sewer but   told the judge “yes, we personally served him”. That has been abolished, hopefully.

There is one significant difference between the two types of foreclosure. A non-judicial sale will take between 3-5 months; a judicial sale can take years. That is why most lenders prefer the non-judicial and lobby the legislatures on that issue. Consumer advocates, on the other hand, obviously prefer the judicial.

I can only provide general information. You should consult a real estate attorney. You will also need to run a title search to determine who else has a claim against the property. If you are in first trust position, you should be able to collect. But the IRS – and many condo associations – have liens that may take priority over your loan.

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