Pursuing the following legal remedies are the final options toward enforcing your rights. When a default on your note is at hand, your legal choices in dealing with this default are:
1) Sue on the note only.
2) Foreclose in-court.
3) Foreclose out-of-court.
4) Take the Deed to the property.
Let's look at each alternative in more detail.
Sue On The Note
You may choose to sue only on the note. There are several reasons for this choice. The payor may have other assets that could be attached. Maybe, you don't want the property. Perhaps, the note you hold is no longer secured, due to completion of a foreclosure superior to your position.
In this case, you are instituting a lawsuit in court against the payor, asking the court to require the payor to pay all money owed to you. A judgment may be obtained in court, stating that the full amount of the note is payable to you immediately. This judgment attaches all non-exempt assets owned by the payor and allows you to take those payor's assets which satisfy the amount of the judgment. Exempt assets are those necessary for the payor's livelihood and are specified by state or federal law.
Some states do not allow you to sue on the note. In many states, if you choose to sue on the note, you can never foreclose on the Deed of Trust or Mortgage. Other states require you to foreclose first, before you may sue on the note.
A suit on the note is not a foreclosure on the property. This alternative is the least utilized. Normally, the secured property is your favored source for satisfying the note.
An in-court foreclosure is called a judicial foreclosure, another form of a lawsuit. The in-court foreclosure laws vary a great deal from state to state; therefore, an attorney is crucial in this process. The in-court foreclosure allows you to institute a lawsuit calling the entire note due (accelerating the note) and requesting a court ordered sale of the property to satisfy the note. Usually, bringing the payments current is not enough to stop the foreclosure and, therefore, the entire note must be paid off. Judicial foreclosure is the only type of foreclosure available in some states.
Another form of judicial foreclosure permits you to call the note due, taking both the property to satisfy your debt and, also, gaining a Deficiency Judgment against the payor. The Deficiency Judgment demands that, if you do not get all your money from the foreclosure sale of the property, the rest of the debt should be paid by the payor. In essence, this type of judgment lets you sell the property to satisfy part of the note and obligates the payor to pay the difference. Sometimes, a Deficiency Judgment is only allowable on certain types of properties, and often is not allowed for personal residence foreclosures.
There are many reasons for a judicial foreclosure. Your particular state may not allow out-of-court foreclosure. Possibly, the payor has disputes with you or a former owner of the note. You may also want to have a receiver appointed to collect revenues. Or, you may want a Deficiency Judgment. You may usually want a Deficiency Judgment for two reasons: your payor has other assets which you think can be used to pay the debt; or the property has become devalued, due to lowering of the real estate value or destruction of the property.
Be sensitive to the disadvantages of this option. A difficult reality of judicial foreclosure, is the possibility of resulting Redemption Rights of the payor. Through the Redemption Rights, the payor may pay off the debt within a specific time period, after the court ordered sale of the property. Moreover, the legal process can be lengthy, which is costly to you, both in fees and delayed or reduced payments.
The most popular choice in a default situation is the foreclosure which takes place out of court. This is called a non-judicial foreclosure, usually performed by an attorney or a foreclosure professional. If this is an alternative in your state, you may re-take the property without getting any other compensation from the payor. However, some states do allow a Deficiency Judgement after the property foreclosure is completed. In most states, the payor has the option to bring the payments current, prior to foreclosure. Otherwise, a foreclosure sale of the property takes place, whereby you are either paid off or end up with the property yourself.
This type of foreclosure is chosen ordinarily when the payor apparently has no other assets or ability to pay, when the property is worth more than what is owing on the note, or when language in the documents dictate this as the only legal option. The advantages are that courts are avoided; thereby decreasing the waiting time, costs, and attorney's fees. In some states, the Redemption Rights are also eliminated. This process is generally the simpler choice.
There are distinct disadvantages to an out-of-court foreclosure, though. The payor can choose to bring the payments up to date, in which case, the note may not have to be paid off. You may then find yourself going into the non-judicial foreclosure proceedings with the same payor again and again. Also, a payor with disputes may force you into court to get out of paying all or part of the note.
Both in-court and out-of-court foreclosures may incur the resentment of the payor. The payor may pocket revenues from the property, occupy the property during the proceedings without paying, and/or destroy the property. Eviction may also become necessary, after completion of the foreclosure and/or Redemption Rights.
Deed In Lieu Of Foreclosure
The fourth method of dealing with defaults is to take the Deed in lieu of foreclosure. While this method is the fastest and least expensive, the payor must choose to cooperate. Usually, the payor is then "off the hook" for the debt, and you are possessor of the property. The payor frequently believes this is the appropriate or most honorable way to deal with a default. However, the payor may be trying to avoid a Deficiency Judgment. When a payor is pressing you to take the Deed, the ultimate choice is yours. Many times, the payor may decide to give you the Deed after foreclosure proceedings have begun.
Taking the Deed gives you immediate control over the property, so the property can provide revenue and deterioration can be minimized. Be aware that you may be anxious at this point to take the Deed. Take the time to make a careful title search, scrutinizing all the liens on the property. Then, have your attorney word the Deed properly, to maintain your rights to foreclose against junior lienholders.
The drawback to taking the deed is that you only get the property and nothing else. However, there are times when, to avoid a Deficiency Judgement and a poor credit rating, the payor may agree to owe you a portion of the note, in addition to giving you the deed.