Foreclosure by judicial sale involves the sale of mortgaged property under the intervention of a court. It is typically ordered in instances of dispute where the property debt cannot be resolved, or if the borrower is insolvent and cannot afford to continue mortgage payments.
Proceeds from a judicial sale will first be directed towards satisfying the original mortgage. After that, other lien holders or second mortgages may receive proceeds from the sale. If there are any proceeds leftover after that, the borrower can sometimes receive proceeds as well.
Foreclosure through judicial sale is available in all states. Actually, judicial sale is the required method for foreclosure in most states.
Some states also allow foreclosure by power of sale, which means that the foreclosure occurs without the use of the court system. Power of sale is only available in 29 states; however, judicial sale is available in all states as a matter of law.
One of the most important aspects of any foreclosure process is ensuring that all parties are included in the proceedings. In a judicial sale, the parties may be divided into two classes: “necessary parties” and “proper parties”.
Necessary parties are defined as those parties that MUST be included in the foreclosure process. Any party that acquired an interest in the property after the initial mortgage was taken out is considered to be a necessary party. The party bringing the foreclosure suit must name these parties in the case, even without their consent.
Any party that acquired a lease, lien, easement, etc. after the mortgage is executed is considered a necessary party. For example, suppose that party A takes out an initial mortgage from party B. Then party A decides to take out a second mortgage from party C. Since party C obtained their interest after the initial mortgage, they must be named in the suit if party B files a foreclosure case.
The second type of party in a foreclosure by judicial sale is known as a “proper party.” Proper parties are those that obtained an interest in the party before the mortgage in question was executed.
Proper parties are parties that may be helpful in the foreclosure process, but are not essential to the case. They are considered voluntary parties and cannot normally be named without their consent. Such parties are normally not affected by the outcome of the suit. Sometimes a judge may order a proper party to be named in the case anyway if their input will be helpful for the judicial sale.
Sometimes a judicial foreclosure sale does not satisfy the entire mortgage amount. In such cases, the lender may file a deficiency judgment against the borrower to recover back or missing payments. For example, suppose that the lender of a $15,000 mortgage only received $10,000 from the proceeds of the judicial sale. They may then sue the mortgagor for the remaining $5,000, which is the amount due under mortgage payments.
Deficiency judgments are not always allowed in every jurisdiction. Also, even if they are allowed, they may be modified according to “fair value” legislation. That is, the mortgagor will only be able to recover amounts that are based on the fair value of the property at the time of the sale, not at the time of the mortgage agreement.
If you are facing foreclosure, or if you are being named as a party in a judicial foreclosure sale, you may wish to contact a real estate lawyer. Your attorney can help you review all the relevant documents so that your interests are protected. Also, if you need representation in a court of law, your lawyer can advise you on how to proceed. Experienced real estate lawyers can also help you with deficiency judgments if necessary.