Managing Your Assets: When to Judicially Foreclose
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This brochure is designed to assist you, as the beneficiary of a deed of trust, in determining whether you should elect to pursue a judicial foreclosure rather than a foreclosure pursuant to the power of sale contained in that deed of trust. As discussed below, in some situations, a judicial foreclosure provides far greater benefits to the beneficiary of a deed of trust than are available with a nonjudicial foreclosure. The secret, of course, is to know when it makes sense to undertake a judicial foreclosure.
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What is a Judicial Foreclosure?
A judicial foreclosure, simply stated, is a foreclosure conducted with the assistance of a court. It is initiated by filing a complaint in the county in which the property encumbered by the deed of trust is located. The sale of the securing property is conducted under the authority and control of the court and, when completed, the court oversees the distribution of any sales proceeds.
In comparison, a nonjudicial foreclosure, or foreclosure pursuant to power of sale, is conducted by the trustee under the deed of trust, usually an independent foreclosure service or the foreclosure department of a title insurance company.
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When to Judicially Foreclosure
Generally speaking, there are three situations in which it may be more beneficial to pursue a judicial foreclosure than a nonjudicial foreclosure.
First, if the securing property is income-producing, then you may want to judicially foreclose. Income-producing property includes both residential rental units such as four-plexes, apartments and rental condominiums, and commercial rental property, such as shopping centers, office buildings and industrial property.
Second, if there is a great likelihood that the defaulting borrower will commit waste to the securing property, then you may want to judicially foreclose. Waste is physical harm or injury to the property, and can range from a failure to maintain landscaping to actual looting of the property such as by the removal of fixtures or damaging or destroying the buildings on the securing property.
Third, if the borrower can be held legally liable for a deficiency judgment and you believe that (a) the value of the securing property is significantly less than the debt it secures, and (b) a judgment against your borrower could be collected, then you may want to judicially foreclose. Deficiency judgments are available in several situations such as where the debt secured by the deed of trust arose out of the purchase of non-seller financed commercial or multi-unit (5 units or more) residential real property or as the result of the refinancing of an existing debt.
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Benefits of a Judicial Foreclosure
There are two main benefits of pursuing a judicial foreclosure. These benefits are the result of relief that is available only from a court.
First, you can seek the appointment of a receiver to control and manage the securing property pending completion of the foreclosure sale. Once appointed, the receiver can collect all rents generated by the securing property, thereby ensuring that this rental income, less expenses, is available to be applied to the amounts owed on the debt secured by the deed of trust. Where authorized by the court, the receiver also can take steps to safeguard the securing property to prevent any damage to the premises, thereby ensuring that it retains the highest possible value.
Second, you may be able to obtain a deficiency judgment against the borrower. That judgment is enforceable against all non-exempt assets of the borrower for up to 20 years from the date of the judgment.
There are some drawbacks to judicially foreclosing. These include the extra time and expense involved in a court-controlled foreclosure and the fact that the borrower may have up to one year to redeem the property, which could make it more difficult to resell the foreclosed property quickly.
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As shown, you may find it to be in your best financial interest to pursue a judicial foreclosure in the event your borrower defaults. Before making that decision, though, be sure to consult with an attorney who has experience in this area of the law to ensure that your interests will be best served by electing to judicially foreclose.
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