Judicial vs Non-Judicial Foreclosure – Definition and Process

The foreclosure process varies by state and can take two forms: judicial and non-judicial foreclosure. New York is considered a judicial foreclosure state, but non-judicial foreclosure is technically allowed despite being quite uncommon. Judicial foreclosure is generally required in cases involving residential properties.

In a judicial foreclosure, the lender must bring the claim to court. In New York, the borrower of a residential mortgage is entitled to a pre-foreclosure notice 90 days prior to the lender filing a claim. The borrower will then have 20 to 30 days to file an answer, depending on how the complaint was served. There will then be a mandatory settlement conference, during which the parties will negotiate potential alternatives to a foreclosure, including modifications to the loan agreement or certain refinancing options. If the parties are not able to reach a settlement, lenders generally will file a motion for summary judgment in order to avoid trial. Trials are rare in foreclosure cases because the merits of a case are often evident in documents filed with the court. Once final judgment is entered for the case and the amount owed is determined, the lender moves forward with disposing of the property via an auction or foreclosure sale.   

The primary difference between judicial and non-judicial foreclosures is that the latter does not involve court proceedings. Non-judicial foreclosures are generally used when the mortgage agreement contains a power of sale clause, in which the borrower consents to the sale of the property in the case of default. In New York, they are most commonly applied to situations involving co-ops. Instead of using the court system, the lender invokes the New York Uniform Commercial Code (UCC), which allows the lender to take possession of and sell the borrower’s collateral (usually shares in the property).

judicial vs nonjudicial foreclosure

THE EFFECT OF COVID ON FORECLOSURE ACTIONS: New York has, due to the impact of COVID, placed a moratorium on commercial foreclosures. Initially announced on March 20, 2020, Governor Cuomo has extended the moratorium through January 1, 2021 (See Executive Order No. 202.70) and now further until February 28, 2021. The state is otherwise allowing foreclosure proceedings to resume. The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) prohibits both the initiation and finalization of foreclosure proceedings involving mortgages funded through federal government-sponsored entities (GSEs).

Although the moratorium does not specifically address the inclusion of non-judicial foreclosures, recent cases suggest that a court would not find UCC foreclosure sales commercially reasonable at this time.

Moreover, New York and federal law currently allow those experiencing financial difficulties to request a 180-day forbearance.

What Is A Foreclosure?

When a purchaser of property takes out a mortgage, the lender retains the right to claim the property if the purchaser fails to meet the terms of the mortgage agreement. Foreclosure refers to the legal process through which the lender seeks to take possession of the property when the borrower defaults on the mortgage loan (or, in other words, stops making the mortgage payments). It allows the lender to recover the balance remaining on the mortgage.

Alternatives to Foreclosure 

When faced with a potential foreclosure, there are various alternatives that a borrower may want to consider. Most of these alternatives will require consent from the lender.

Loan Modifications

The borrower may qualify for a lender’s program that will allow for the existing terms of the loan to be modified by reducing the interest rate, extending the terms, and/or adding arrearages to the back of the loan.  The goal here is to get the borrower back on track with an affordable mortgage payment that the lender will agree to.

Repayment Plans 

It is possible that a lender would agree to a repayment plan as an alternative to foreclosure. Under such a plan, the lender would allow the borrower to continue making payments as normal while apportioning late payments across multiple months.

Short Sales

In a short sale, the borrower voluntarily sells the property for a value that amounts to less than what is owed on the mortgage. The lender must consent to the short sale before a borrower can initiate the process.

Mortgage Assumptions

A defaulting borrower can convey the mortgage to someone who is willing to assume the loan along with the property. The lender will have to approve the new buyer.

Deed in Lieu of Foreclosure

The borrower may also be able to avoid foreclosure by transferring all interest in the property to the lender in order to satisfy the loan obligation. It is often a last resort move made after the borrower has accepted that he will lose the property.

Forbearance

In a forbearance, the lender allows the borrower to pause or decrease mortgage payments for a period of time.

Bankruptcy

Bankruptcy may be preferred to foreclosure in some cases. Although both negatively impact credit, bankruptcy may in certain cases release the borrower from debt, depending on which chapter the borrower files. The hit to credit can be worse in bankruptcy, but bankruptcy can prevent a foreclosure sale, allowing the borrower to keep his property, and may otherwise offer certain long-term benefits.    

Which Foreclosure Alternative To Choose

The appropriate foreclosure alternative to pursue will depend on the particular circumstances of the borrower. A borrower may want to take into consideration present ability to pay, desire to keep the property under foreclosure, potential impacts to credit, among other factors in deciding which route to take. It may be helpful to consult a specialist.

How Can Alternatives Affect My Credit

A declaration of bankruptcy and short sale affect credit similarly to a foreclosure (in a short sale, whether or not the borrower has a deficiency following the sale may impact the score as well). Although bankruptcy has, on average, a slightly more deleterious impact on credit score than the other two, the actual impact will depend on the borrower’s unique circumstances.

Credit is also impacted negatively by a deed in lieu of foreclosure and mortgage forbearance but to less of an extent than in a foreclosure.

Foreclosure Prevention Coaching 

A borrower may want to consult the lender or an advisor as soon as there are difficulties in making payments. In general, the earlier you act, the more options you have and the more time you have to decide the best course of action. There will also be more opportunities to prevent foreclosure the earlier you begin.

What to Do If You Are Delinquent

Ideally, you would begin working towards a solution with your lender before becoming delinquent on payments. However, if you are delinquent on a mortgage payment, it is recommended that you study your options and act in a time sensitive manner. In New York, the lender must send you a 90-day pre-foreclosure notice before filing a case against you. Take some time to figure out what the potential alternatives are based on your priorities and execute a plan. It may help to consult a specialist.

Speak with a Specialist To Pick Up The Best Alternative

Speaking with a specialist may be of great help when determining the best alternative for you. In particular, a lawyer with the right expertise may be able to guide you in making a decision on the most favorable route forward. 

Do I Need a Lawyer for Alternatives to Foreclosure

A lawyer can assist with making strategic decisions while the borrower contemplates alternatives to foreclosure. An attorney can also help guide the borrower through various processes like modifying the mortgage, completing a deed in lieu of foreclosure, and negotiating with the lender. If the borrower intends on declaring bankruptcy, obtaining advice from a lawyer is highly recommended due to its potential complexity and long-term effects.

FAQ section

Q: What is a benefit of non-judicial foreclosures?

A: Non-judicial foreclosures tend to favor the lender, given the shorter timeline and lower costs. They are fairly rare in New York, as foreclosures of residential properties require court intervention.

Q: How long does a judicial foreclosure take?

A: The length of the process may vary, but on average, it takes about 15 months in New York.

Q: How soon after foreclosure is eviction?

A: Following the sale of the property at foreclosure, either the new owner or the lender must provide the borrower with a 90-day notice to leave the property prior to initiating an eviction case.

Q: How long does foreclosure stay on record?

A: Foreclosures are noted on one’s credit report for seven years starting from the initial instance of default.

Q: Do you still owe a mortgage after foreclosure?

A: Sometimes, the amount that the property sells for at foreclosure is lower than the amount owed on the mortgage. In such a case, there is what is called a “deficiency.” Lenders in New York are allowed to seek a deficiency judgment against the borrower in order to recoup the remaining balance.