Foreclosure is a legal process. When borrowers cannot repay their debts, creditors use foreclosure to recover the balance owed them. These creditors include lenders, suppliers, contractors, employees and all others who have a financial interest in the property.
Overview
The beginning step of foreclosure is to notify debtors that they are in default. The debtor is given a redemption period to satisfy the debt. If the debt is not paid during the redemption period, the business may be forced into bankruptcy. In a foreclosure, assets are sold and the proceeds distributed to creditors according to their share.
Since state laws differ, you should consult with both a foreclosure attorney and bankruptcy lawyer (or other sources) for the laws of your state. In most states, those entitled to a portion of the proceeds include mortgage lenders, suppliers, those covered by a mechanic’s lien.
Workers who have supplied labor or materials to improve the property are covered under the mechanic’s lien. Some states include the employees of contractors and subcontractors in the mechanic’s lien.
Types of Foreclosures
- Judicial Foreclosures
A judicial foreclosure is conducted under a court’s supervision. The court may be local, state or federal, and foreclosure is begun with a lawsuit initiated by the lender against the borrower. All parties having a financial interest must be notified, under this method, the lender is paid first. Lien holders receive their payment in full if the proceeds are sufficient. If not, the proceeds are divided as a percentage of debts. Remaining proceeds, if any, are paid to the borrower. Judicial foreclosures are available in all states.
- Non-judicial Foreclosure
Non-judicial foreclosures are conducted without the court’s supervision. Since trust deeds replace mortgages, the lender has the power of sale when payments are in default. The process is usually faster and less expensive than judicial foreclosures. The proceeds are distributed in the same manner as in judicial foreclosures.
Commercial Property Foreclosure Process
The following are a list of steps in the traditional foreclosure process:
- Default
Lenders notify buyers in writing that payments are missing. The buyer may arrange refinancing or some other agreement to rectify the default.
- Posted Notice
After a specified number of missed payments, the lender sends a notice of intent to file a civil suit of foreclosure. States have different waiting periods to bring suit to court.
- Legal Proceedings
Both sellers and borrows must appear in court. The lender is responsible for documenting the payments in default. In states where trust deeds are used, lenders may foreclose commercial property without going to court.
- Foreclosure Proceedings
In foreclosure proceedings, the court may return the property to suppliers or sell the property to pay outstanding creditors. Commercial real estate property may be released to the lender for reselling.
Foreclosure for Homes
Home foreclosures are similar to commercial foreclosures. If the default isn’t corrected, the property is sold at public auction. Certain forms of bankruptcy can temporarily halt or delay foreclosure, but only a trained bankruptcy lawyer should be consulted before using this option in conjuction with foreclosure proceedings.
