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The best thing to do in the
foreclosure process is to know exactly what a foreclosure is and how
it works. Education in this area will help in all dealings with this
matter and will help prevent complications as the process furthers.
To start, a foreclosure is the legal
proceeding in which a bank or other secured creditor sells or
repossesses a parcel of real property due to the owner's failure to
comply with an agreement between the lender and borrower called a
"mortgage" or "deed of trust". Commonly, the violation of the
mortgage is a default in payment of a promissory note, secured by a
lien on the property. When the process is complete, it is typically
said that "the lender has foreclosed its mortgage or lien."
In the United States, there are two sorts of foreclosures in most
common law states. Using a "deed in lieu of foreclosure," the bank
claims the title and possession of the property back in full
satisfaction of a debt, usually on contract. In the proceeding
simply known as foreclosure (or, perhaps, distinguished as "judicial
foreclosure"), the property is exposed to auction by the county
sheriff or some other officer of the court. Many states require this
latter sort of proceeding in some or all cases of foreclosure, in
order to protect any equity the debtor may have in the property, in
case the value of the debt being foreclosed on is substantially less
than the market value of the immovable property (this also
discourages strategic foreclosure). In this foreclosure, the sheriff
then issues a deed to the winning bidder at auction. Banks and other
institutional lenders typically bid in the amount of the owed debt
at the sale, and if no other buyers step forward the lender receives
title to the immovable property in return.
Other states have adopted non-judicial foreclosure procedures, in
which the mortgagee, or more commonly the mortgagee's attorney or
designated agent, gives the debtor a notice of default and the
mortgagee's intent to sell the immovable property in a form
prescribed by state statute. With this "power-of-sale" type of
foreclosure, if the debtor fails to cure the default, or use other
lawful means (such as filing for bankruptcy which provides a
temporary automatic stay to the foreclosure proceeding) to stop the
sale, the mortgagee or its representative will conduct a public
auction in a similar manner as the sheriff's auction described
above. The highest bidder at the auction becomes the owner of the
immovable property free and clear of any interest of the former
owner but the property may be encumbered by any liens superior to
the mortgage being foreclosed eg. a senior mortgage, unpaid property
taxes etc. Further legal action, such as an eviction may be
necessary to obtain possession of the premises.
"Strict foreclosure" is an equitable right available in some states.
The strict foreclosure period arises after the foreclosure sale has
taken place and is available to the foreclosure sale purchaser. The
foreclosure sale purchaser must petition a court for a decree that
will cut off any junior lienholder's rights to redeem the senior
debt. If the junior lienholder fails to do so within the judicially
established time frame, his lien is cancelled and the purchaser's
title is cleared. This effect is the same as the strict foreclosure
that occurred at common law in England's courts of equity as a
response to the development of the equity of redemption.
In most jurisdictions it is customary for the foreclosing lender to
obtain a title search of the immovable property and to notify all
other persons who may have liens on the property, whether by
judgment, by contract, or by statute or other law, so that they may
appear and assert their interest in the foreclosure litigation. In
all US jurisdictions a lender who conducts a foreclosure sale of
immovable property which is the subject of a federal tax lien must
give 25 days' notice of the sale to the Internal Revenue Service:
failure to give notice to the IRS will result in the lien remaining
attached to the immovable property after the sale. Therefore, it is
imperative that the lender obtain a search of the local Federal Tax
Liens so that if the persons or companies involved in the
forelcosure have a federal tax lien filed against them, the proper
notice to the IRS will be given. A detailed explanation by the IRS
of the Federal Tax Lien process can be found
here.
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