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Steps to Avoiding Foreclosure

Foreclosure is the term given to the process of terminating the rights of the lender to redeem his/her loan. This is a legal process by which the borrower is pardoned from paying his debt. This process is legalized either by the court or by the operation of law. Mass foreclosure of debts lead to sub-prime crisis in 2007-2008 in the USA.

What is Foreclosure?

Every time a lender lends some one a loan, he takes some asset as security against the loan. This asset can be a house, any other property or ‘word of another economically sound person’. When the borrower, due to some reason, defaults on the loan, the lender owns the right to own and sell the property in order to regain his money. Through foreclosure, the borrower tries protecting his property. The court of equity allows the borrower the right to exemption from the lender’s right to the property if the borrower can pay the sum (loan) in some form. The lender is not always sure that he can extract his loan value. Hence, through the process of foreclosure, the lender tries to acquire his loan value in land assets (called fee simple). The lender (the lien holder) can foreclose for debts like overdue taxes, unpaid contractors' bills or overdue homeowners' association dues.

Types of foreclosure:

Terms and conditions of a loan are described in a document called ‘mortgage document’. The borrower has the right to initiate a foreclosure within the time period specified in the mortgage document. Within the USA and Canada several types of foreclosure exists. ‘Judicial sale’ and ‘power of sale’ are two foreclosures that are widely used in the USA. ‘Judicial sale’ foreclosure is initiated by the lender and the property is sold in judicial supervision. ‘Power of sale’ foreclosure occurs out of the judicial supervision. Right to ‘Power of sale’ foreclosure is retained by the lender if ‘deed of trust’ or equivalent clause is present in the mortgage document.

Steps to Foreclosure Prevention:

Step 1:

It is necessary to read between the lines while signing a loan agreement to look for hidden catches.

Step 2:

One should always get insurance for loan repayments and ensure that the insurance policy covers all possible risk factors.

Step 3:

Staying in touch with a loan manager specially if in trouble would prevent any technical mistakes.

Step 4:

One must never save face if he is unable to pay on time.

Step 5:

To overcome temporary problems discuss issues with a loan manager and try to get deferment of EMIs.

Step 6:

If all options are exhausted, invoke an insurance clause as a last resort.

Step 7:

Avoid foreclosure at all costs, as it will result in heavy losses, loss of mortgaged property, loss of credibility etc.

The borrower can petition the court for an injunction against a foreclosure. But to facilitate judiciary’s interference, the borrower must put an equity (asset/ bond) equal to the amount of the debt (loan). Generally, a lender requests for a foreclosure. California, Georgia, and Texashave a common law rule according to which the individual who requests for a foreclosure first return the benefits it has gained from the deal.

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