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Law Offices of Ronald W. Rutz
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February 1, 2003: The Process of Foreclosure

Q: I am embarrassed and reluctant to ask this question, but we are about to lose our house through foreclosure. Could you explain the process so I have a better idea of what will be happening?

A: I am sorry. Presently foreclosures appear to be running at record levels for recent years and may at some point match the high water mark of the late 80s and early 90s. Because of recent layoffs and reduced income to self- employed persons, future foreclosures may be the storm clouds forming on the horizon, ready to sweep over us like a cloudburst and put a damper on the real estate industry.

When you borrowed the money to buy your house, you "promised" to repay that amount under the terms and conditions of a document called a promissory note. If you were unable to keep the promises that you made, the lender could sue you to get back the money based upon the promissory note.

But to ensure that you had assets to reimburse the lender, a security position was taken in the house either through a mortgage or a deed of trust. Either document pledges the house to fulfill the commitments that were made when the lender "gave" you the dollars to buy the house.

Most states use a mortgage to give the lender the ability to replace the funds that were loaned with the house or with the proceeds from the sale of the house. But the process requires what amounts to a "lawsuit" with the corresponding costs and delays associated with litigation. Mortgages are occasionally used in Colorado.

But in Colorado a deed of trust is the instrument of choice in securing a promissory note. If there is a failure to make payments, the holder of the note gives notice to the borrower and a chance to bring the note up to date. If payment is not made, then the lender will turn the matter over to a state official called a public trustee who will begin the steps to sell the property.

At the same time, court papers will be filed for a hearing where a judge will review that matter, determine that there is a default and that the proper steps had been taken by the lender to begin foreclosure, and that the borrower has no defenses or other legal reasons to halt the proceeding.

In the meantime the public trustee will process the paperwork, send out notices to anyone who might have an interest in the property, publish a notice to the public regarding the date of sale, and otherwise see that the statutory steps and requirements are being followed.

Remember at anytime, the foreclosure can be stopped by paying off the past-due installments, defaulting interest and charges, plus the cost of the foreclosure proceedings up to that point. But the right to reinstate the note ends when the property is sold. Traditionally the property would be offered to the public at the courthouse, usually at the east entrance. In Larimer County, the sale will be held in the public trustee's office.

Anyone can bid at the public trustee's sale but normally the lender will bid the amount of the unpaid balance of the note plus the cost of foreclosure, but anyone can bid more. After the sale, you would still have the right to get the property back but you must buy out the bidder at the foreclosure price, plus interest on the money, within 75 days of the sale (six months for rural property).

Note that the foreclosure sale will not wipe out the debt and permit you to walk away in all cases. If the lender does not bid the full amount owed and has otherwise properly reserved its right, a "deficiency" against you can be collected under the promissory note by the lender, filing a separate collection suit for the unreimbursed amount.

Because of excesses in the early 1990s by the financial community, this right for continuing personal liability can be halted depending upon the kind of lender involved, if the bid on the property was reasonable as compared to the value of the property, etc.

Normally during this period, including the redemption time, you may live in the property.

The bottom line is that all is not lost. As pointed out previously, you still have the right to reinstate the loan during the process and even receive the property back after the sale for the amount that was paid at the sale.

This short summary can be dramatically affected by the terms of the promissory note, mortgage, or deed of trust and also the surrounding facts, especially your conduct. So please contact and hire an experienced real estate attorney who can be your helpmate in all of this.

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