Thursday, June 30, 2011

Understanding The Difference Between Judicial and Non-Judicial Foreclosures

By Kenneth F. McCallion, Esq. 

It is very important to understand the difference between judicial foreclosures and non-judicial foreclosures. In simple terms, a judicial foreclosure requires a proceeding in a court. A non-judicial foreclosure does not require any proceeding in a court. In each type of procedure, a lender has the right to auction a property if the lender has properly filed all of the necessary paperwork. Let’s review important aspects of each. 

Judicial Foreclosures

As I mentioned, a judicial foreclosure must proceed in a court. Normally, a lender will send a written notice of intent to foreclosure (“written notice”) before filing a foreclosure action in court. The written notice may contain a demand for the payment of the entire mortgage balance plus arrears aka “acceleration” or the lender will provide an option to reinstate the loan by paying missed payments and other fees. The lender will refer the loan file to its attorney if the borrower has not paid the amounts due in the written notice within a specified time frame. After receiving the loan file, the lender’s attorney will prepare the appropriate foreclosure complaint and file the complaint with the court. The lender may also file a lis pendens against the property. A lis penden is a public notice of foreclosure. After the lender files the complaint in court, the lender must properly serve a foreclosure complaint against the borrower.  

Keep in mind that some states require mandatory foreclosure settlement conferences (“settlement conference”) after a foreclosure complaint is filed with the court. The purpose of the settlement conference is to facilitate loan modifications or settlement negotiations between the bank and the borrower. Furthermore, its purpose is to help preserve judicial time and resources. Many state courts are clogged with thousands of pending foreclosure cases. A negotiated settlement helps the court clear the case from an all ready crowded court docket. At the settlement conference the borrower has the opportunity to provide financial documents in order to obtain a loan modification. The court will expect the bank and the borrower to act in good faith towards finding a settlement. The mandatory settlement conference does not “trump” the applicable laws regarding the foreclosure process. However, a judge may consider the behavior of the bank or the borrower in the context of any testimony provided by either party.

Each state has specific rules and procedures regarding how a lender must process a judicial foreclosure case. A homeowner has the right to challenge the lender’s process of the case. In fact, all homeowner’s should defend themselves in court. Many homeowners ignore foreclosure papers “served on them”. Many homeowners may not know that a foreclosure case is pending against them. It’s best to stay on top of your loan file by contacting the lender once a month to obtain a status on your loan. If the lender has referred your file to an attorney you should write down all of the attorney’s information, including the date the file was transferred to the attorney.

If a lender can successfully establish it has the right to “foreclosure” on a property then the court will give the lender permission to sell the property at a foreclosure auction.

Non-Judicial Foreclosure

A non-judicial foreclosure does not require any proceeding in a court. The requirements for processing a non-judicial foreclosure are established by applicable state law. Generally, upon the borrower’s failure to make loan payments a lender will mail a “Notice of Default” to the borrower.  If the borrower fails to “cure” the demands in the Notice of Default or fails to pay the amounts due then after the legally required time has expired a lender can proceed to a public auction of the property.

Each state has specific rules and procedures regarding how a lender must process a non-judicial foreclosure. For example the service of Notice of Default may or may not be necessary or the time frame to process the foreclosure may be different. Most non-judicial foreclosures are handled by an appointed trustee not an attorney.

In order to challenge a non-judicial foreclosure a homeowner must start a lawsuit in state court against the lender. 


There are several principles you should keep in mind:

  1. Each state has a unique set of laws and rules as it pertains to processing a judicial or non-judicial foreclosure. Make sure you understand the rules in your state and make sure you speak to a qualified professional. 
  1. A judicial foreclosure gives the borrower the right to defend against a foreclosure. Therefore, a borrower must always exercise his or her right to defend a foreclosure even if the borrower has missed mortgage payments. The most important step towards protecting your right to defend yourself is to properly file a written answer/response to any foreclosure papers served upon you. 
  1. In order to defend or challenge a non-judicial foreclosure it is necessary to start a case in court. In other words, you must file a lawsuit, get before a judge and establish the right to defend or challenge a non-judicial foreclosure. In most instances, you will need to hire an attorney to help prepare the paperwork. 
  1. It takes less time to auction a property in a non-judicial foreclosure then a judicial foreclosure. 
  1. Condo’s and houses are considered real estate. Cooperatives aka Coops are not considered real estate. Instead a Coop consists of the ownership of shares in a cooperative association and a proprietary lease for the Coop apartment. The “foreclosure” process is different when a Coop owner does not pay his or her mortgage. The rules for judicial or non-judicial foreclosure do not apply to a Coop. If you are in default on a mortgage against your Coop, make sure you speak to an attorney.
In conclusion, you should be aware of your state’s foreclosure process. Your knowledge of the applicable foreclosure process will help you make the right decisions during a mortgage loan default.  

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