Foreclosure

From Academic Kids

Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a piece of real property due to the owner's default on its promissory note. 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 foreclosure in most common law states. Under "strict 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, 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 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 they get title to the property in return.

Other states have adopted non-judicial foreclosure proceedings, in which the mortgagee, or more commonly the mortgagee's attorney, gives the homeowner a legally specified notice of the default and the mortgagee's intent to sell the property. If the homeowner fails to cure its default, or use other lawful means (such as filing for bankruptcy) 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 property free and clear of any interest of the former homeowner.

In most jurisdictions it is customary for the foreclosing lender to run a title search of the property and to name 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 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 property after the sale.

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