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Judicial Foreclosures

If you live in one of the states listed below, and your home loan is secured by a mortgage, the foreclosure will probably take place in court.

States Where Judicial Foreclosure Is Customary

Arizona (sometimes)	New Jersey
Connecticut	New Mexico (sometimes)
Delaware	New York
Florida	North Dakota
Hawaii	Ohio
Illinois	Oklahoma (if the homeowner requests it)
Indiana	Pennsylvania
Iowa	South Carolina
Kansas	South Dakota (if the homeowner requests it)
Kentucky
Louisiana	Vermont (sometimes)
Maine	West Virginia (sometimes)
Nebraska	Wisconsin

In judicial foreclosures, your lender gets things started by filing a foreclosure lawsuit in the local court. You will receive official notice of the lawsuit when a sheriff or process server personally serves you with (or posts on your door in some cases):

• a summons explaining your right to file a written response to the lawsuit and telling you how long you have to do so, and
• a copy of the document (called a petition or complaint) that requests the foreclosure and that sets out the reasons why the judge should issue a foreclosure order.

You can contest the foreclosure or let it proceed. If you do respond, the court will set a date for a hearing, at which you and the lender will present your evidence and arguments. After the hearing, the judge will either:

• order the foreclosure to go ahead (and in many states, set the sale date)
• postpone a final decision to give the lender more time to fill in a missing gap (proof of ownership, for example), or
• dismiss the case, sending the lender back to the drawing board.

In two states, Connecticut and Vermont, a judge who approves the foreclosure can order ownership (title) to be transferred then and there. This is called a strict foreclosure.

Judicial foreclosures are seldom if ever permanently derailed, but they can be significantly delayed. If you have grounds to fight the foreclosure, either because the foreclosing party can’t prove its case or because you offer proof that casts doubt on the foreclosure’s legality, such as evidence that you were not behind on your payments after all, it can take many months before the case is resolved one way or the other.

Eventually, if the foreclosure is legally appropriate, the judge authorizes your house to be sold at auction or, in the strict foreclosure states, transferred directly to the lender.

Here’s how a typical judicial foreclosure might proceed.

Peter and Mary bought their house two years ago at the then-reasonable price of $400,000. They made a 10% down payment and borrowed the other $360,000. The house now has a market value of just $325,000. Peter was laid off from his $60,000-a-year job and now earns $10 an hour. He and Mary can no longer afford their payments.

They live in Ohio, a judicial foreclosure state. Once they miss three payments, the lender (a voluntary participant in a program called Project Lifeline) sends them a written notice that foreclosure proceedings won’t start for 30 days and that Peter and Mary should contact them for a possible workout. After 30 days have passed, and Peter and Mary haven’t responded, the lender sends them a ten-day notice of intent to begin foreclosure proceedings. The notice tells them that the proceedings can be avoided if they make up the missed payments plus costs and interest. Peter and Mary decide to let the foreclosure happen, given that they have no equity in the house, they won’t be able to make the payments (even if modified downward), and the prospects for future appreciation of the property are bleak.

Two weeks later, Peter and Mary are served with a copy of a summons and foreclosure complaint that the lender has filed in the local court. They have 30 days to respond. They visit a lawyer, who tells them they may be able to put off the foreclosure sale by filing a response contesting the allegations in the complaint and demanding a trial. Unfortunately, the lawyer wants too much money. Peter and Mary could do some research into possible defenses and represent themselves, but they decide they really can’t afford the house any longer and will have to move anyway. They let the 30 days go by without responding.

The court issues a default judgment (that’s what happens when you don’t respond to a suit filed against you) that authorizes sale of the property. Shortly after that judgment, the foreclosing party sends Peter and Mary a copy of an official ten-day notice of intent to sell the property. The notice also informs Peter and Mary that they can avoid the sale if they redeem the mortgage by paying it off in full, plus foreclosure costs and attorney fees of $2,500. Peter and Mary ignore the offer, and ten days later the property is put up for sale at auction. But because no buyer comes forward to pay the asking price, ownership goes to the lender.

The entire process, from the time Peter and Mary got the first notice from the lender until the auction, takes about three and a half months. Had Peter and Mary contested the foreclosure and made the foreclosing party prove it owned the loan (an increasingly common defense; see Ch. 7), the process might have dragged on for many more months.

Even though Peter and Mary lose ownership of their home, they don’t have to move out right away. The lender may just let the house sit, waiting for the market to improve. In the meantime, there is no law preventing Peter and Mary from remaining in the home payment free until they receive an official, written eviction notice. In fact, they are doing their neighbors, and the lender, a favor by maintaining the property through their occupancy. (See Ch. 9.)