Judicial Foreclosure: Allowing Homeowners to Stay Longer Without Paying
The recession, the housing market and the overall lag in the economy have hit some areas and some people harder than others. People faced with a job loss, unpaid bills and overwhelming debt are often forced to make difficult financial decisions. Increasingly more common, these decisions include letting go of the family home.
While this is a dramatic and emotional step, it is not the immediate path to homelessness that many people imagine and fear.
Judicial and Non-judicial Foreclosure
According to a report by Lender Processing Services the national delinquency rate for mortgages reached 9.2 percent in the month of May. Additionally, the report found that the cure rate, or the rate at which delinquent loans become up-to-date, was getting worse. RealtyTrac, a foreclosure database website, predicts that over 3 million homes nationwide will be under foreclosure by the end of this year.
When homeowners choose not to or are unable to pay, lenders have different avenues of recourse; the most well-known of which is foreclosure. The process of foreclosure varies from state to state, but typically takes one of two forms: judicial or nonjudicial foreclosure.
Judicial foreclosure is the process by which a bank or lender retakes possession of the property through a lengthy and costly court proceeding. These foreclosures have strict legal requirements and timelines associated with them, including that the lender must file a complaint, give notice to the appropriate parties and that a hearing be held, among others.
Often, these homes are quickly sold below market value. According to housingwatch.com, 16 states require a judicial foreclosure: Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, New Mexico, North Dakota, Ohio, Pennsylvania and South Carolina.
Other states use nonjudicial foreclosure proceedings, also known as power-of-sale foreclosures, where properties are sold without the involvement of the courts often through a public auction. Typically, the lender will issue a notice of default to the borrower and set the date of the foreclosure sale without any assistance from the state or county courts.
Benefits of Judicial Foreclosure to Homeowners
While judicial foreclosures may be tougher on the lender, there may be some limited benefits to the homeowner. Judicial foreclosures take much longer and are more expensive for lenders to pursue. Therefore, there are incentives for lenders to work out agreements or modifications with the borrowers. This also buys the homeowner time and allows them to work out other financial troubles and pay off other debts.
Also, as homes are often sold quickly, the lender may not recover all the money due on the mortgage from the sale of the home. In this case, the lender must pursue a deficiency judgment through yet another legal proceeding.
Alternatives to Foreclosure
With courtrooms backed up and more homeowners finding themselves owing more on their homes than they are worth, lenders and homeowners alike are searching for alternatives to foreclosure that benefit both parties.
Senator Bill Nelson of Florida is seeking to impose a mandatory mediation requirement on lenders who receive federal guarantees or federal insurance on their loans. This legislation seeks to curb the foreclosure rate while helping homeowners stay in their homes and allowing the banks avoid the time-consuming and expensive path of foreclosure.
Some lenders will allow homeowners to renegotiate or modify their existing mortgages to make payments more affordable and reflect the downturn in housing prices. Short sales, where the lender agrees to accept less than the amount owed on the mortgage and not pursue the deficiency, are also common. One drawback to a short sale is that the borrower may still owe taxes on the amount of the loan forgiven. Depending on the amount of the deficiency and the extent to which the market has affected the value of the property, this may be a limited option for some homeowners.
Working With an Attorney
For some people experiencing financial difficulties or facing foreclosure, the best approach may be to work with an experienced attorney.
Chapter 7 or Chapter 13 bankruptcy offer some protection that other avenues of avoiding foreclosure cannot. For one, bankruptcy offers an automatic stay, which can delay or put a stop to foreclosure proceedings and give you additional time to get your finances in order or find a new place to live. A Chapter 13 bankruptcy can allow you time to bring your delinquent mortgage payments current if you intend to keep your home. If you choose to let go of your home, filing bankruptcy can provide you a discharge from your obligations under your mortgage, including outstanding real estate taxes.
Whether you face a judicial or non judicial foreclosure, the process is complex and working with an attorney may be the best way to protect your interests. Contact an attorney in your area to discuss to protect your home and avoid foreclosure.