The legal proceedings initiated by a creditor to recover the balance of a defaulted obligation in which the creditor holds a security interest or ownership by forcing the disposal of or taking control over the personal or real property securing the obligation is foreclosure.  Foreclosure may occur by sale of collateral conducted by a court appointed official, by public sale without court supervision or even without the sale of the collateral.

The sale of property that is the subject of a security interest or mortgage by the secured creditor under authority of a court’s judgment as a result of liquidation, insolvency or other financial duress in order to satisfy an unpaid obligation owed to the creditor is a judicial foreclosure.  It generally calls for a court appointed or public official, such as the sheriff, to conduct the sale of the bankrupt’s assets on behalf of the creditors.

Steps in a Judicial Foreclosure
1. Notice of Default 2. Mediation if Required 3. Foreclosure Filing 4. Trial 5. Advertise Sale 6. Sale 7. Vacate Property/ Eviction

A nonjudicial foreclosure permits a secured creditor to sell the property that is the subject of a security interest or mortgage at public sale without first going to court and without court supervision, although the disposal may have to be advertised and conducted by a sheriff or other public official.  Nonjudicial foreclosure is generally much faster and cheaper than judicial foreclosure.

Steps in a Nonjudicial Foreclosure
1. Notice of Default 2. Mediation if Required 3. Notice of Intent to Foreclosure if Required 4. Advertise Sale 5. Sale 6. Vacate Property/ Eviction

A strict foreclosure is the settlement of a security interest or mortgage held by a secured creditor by means of repossession and without the sale of the collateral, whereby the defaulted debtor’s equity of redemption is extinguished and payment of the debt is required within a period of time set by the court.  If the defaulted debt is not paid off within the specified time period, the secured creditors gain all ownership rights in their collateral with no obligation to sell it.

Creditors frequently do not exercise foreclosure as a remedy to debtor default since the process is slow and cumbersome and courts often do not grant orders for foreclosure.  Furthermore, noncash collateral needs to be assessed in terms of its recovery value and the time and cost involved in foreclosing on it in order to ensure that the asset in which a creditor has a security interest has sufficient realizable value to justify the expense of the foreclosure proceedings.

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