A judicial foreclosure is a process in which the lending entity files a lawsuit in civil court against the delinquent borrower and subsequently receives a judgment for monetary reimbursement in addition to foreclosure.
The judgement is enforceable against the borrowing party as an individual and includes the right to foreclose against the asset, as well as force its sale to cover the outstanding loan balance.
Pros of Judicial Foreclosure Process
While nonjudicial foreclosure is a popular option in the lending industry, there are a number of benefits judicial foreclosure offers that may make it a more ideal fit in some situations, including:
- The lender has a greater degree of flexibility in enforcing a judgement and proceeding against the individual owner for the outstanding debt, especially in cases where the property is over-encumbered;
- A lender is more likely to get repaid following a judicial foreclosure;
- A judgement lasts for ten years—and can be renewed for a further ten years; and
- The associated costs are not exorbitant.
After receiving the signed and entered judgment for money damages and foreclosure from the court, there are several collection methods available to lenders:
Recording “Abstracts of Judgment” in all applicable jurisdictions
This functions as a lien on any real property in these localities and serve as notice to any person or entity wanting to determine the validity of title of property of a named defendant, or the credit worthiness of a former borrower. After an abstract has been filed by a lender, it becomes a secured creditor in the event of a bankruptcy proceeding or comparable proceeding.
Garnishing wages and seizing bank accounts after an investigation to assess if the borrower has a job and the amount in the existing bank accounts
If the debtor has employment, then garnishing wages and seizing bank accounts is the most efficient access to funds from the lender’s perspective.
Conducting Judgment Debtor Examinations at the courthouse in the event a judgment is not totally satisfied via wage garnishment or seizure of accounts
Assuming the debtor has not agreed to a settlement, the lender subpoenas the debtor via an Order for Judgment Debtor Examination (OJD), which is an examination of the debtor by an attorney, under penalty of perjury, held at the courthouse. The debtor is subpoenaed to appear and ordered to produce several documents including tax returns, bank statements, copies of leases, deeds, etc. If the debtor does not appear or cannot produce the requisite documentation, the lender requests that the judge orders a bench warrant for the debtor’s arrest.
Shortcomings of NonJudicial Foreclosure
Though nonjudicial foreclosures are generally more popular than judicial foreclosures, they come with a host of shortcomings. In a nonjudicial foreclosure, a notice of default is sent to the delinquent borrower, affording them a period to cure the default. If the debtor fails to do so, a notice of the sale of the property is issued for a 90-day window, at the end of which, if the default still has not been cured, the property is auctioned. Whatever entity is the highest bidder at the foreclosure auction will have ownership of the property subject to all superior liens—which are those that were recorded against the property prior to the date of the assessment lien. These are most commonly any outstanding mortgages on the property. If there is no bidder for the asset, the lending entity takes ownership of the property, subject to all superior liens, and subject to the debtor’s right to redeem the property within 90 days following the auction.
If the property has enough equity, a third party will typically bid on it; however, if there is little to no equity in the property, the lender receives no benefit from the nonjudicial foreclosure process. The following is a list of additional issues associated with the nonjudicial foreclosure process:
- Nonjudicial foreclosures offer the creditor only a single chance to collect—namely via the auctioning of the property. The creditor cannot collect against the borrower for money damages at all after the foreclosure sale. This holds true even in the event that a property is sold for less than the outstanding loan balance.
- Lenders often choose the nonjudicial foreclosure approach under the misguided assumption that it is always more efficient as it does not involve judicial involvement. The nonjudicial method, however, is also dependent on third-party entities that can significantly prolong the process. Nonjudicial foreclosures are conducted with the help of private trustees, who are usually backlogged by several months. Further, nonjudicial foreclosures are often postponed one or more times for administrative reasons and can be very complex, often resulting in legal issues related to due process and fairness issues down the road.
It is a common misconception that nonjudicial foreclosure is always more efficient, faster and less costly than judicial foreclosure; however, that may not be the case in all scenarios.