Foreclosure
A foreclosure has the effect of extinguishing the mortgage debt to the extent of the amount bid at the sale, whether the sale is to the lender (who can “credit bid” all or part of its debt) or to another party.
An action to foreclose a mortgage, whether by action, by advertisement or otherwise, must be commenced within a specified period. (Ex. In Minnesota, 15 years of the maturity date of the debt secured by the mortgage.) If the mortgage does not contain a maturity date, this period begins to run from the date of the mortgage. If initiated within the 15-year period, foreclosure can be completed after the time limitation has expired. Failure to initiate foreclosure within this statutory 15-year period bars foreclosure of the mortgage.
Once the decision is made to foreclose, the lender must determine which method to use. The decision to proceed by action or advertisement involves many considerations and is often a difficult decision. Foreclosure by advertisement is generally less complicated, less costly and quicker. Because foreclosure by advertisement does not require court involvement, the chance of the borrower raising a counterclaim is reduced. However, the lender foreclosing by advertisement cannot seek a deficiency judgment against the borrower if the redemption period is six months or five weeks. In addition, foreclosure by advertisement does not provide a forum through which to resolve title problems or lien priority issues. Because no court approval is involved, a foreclosure by advertisement is more susceptible to later attack. Because it is an actual lawsuit, foreclosure by action may be a better alternative when the lender seeks to assert other claims against the borrower or any secondary obligors, or if the lender also seeks to recover other collateral given to secure the borrower’s obligations. Foreclosure by action preserves the lender’s right to seek a deficiency judgment against the borrower when a deficiency might by barred by foreclosure by advertisement. Also, it provides the lender an opportunity to name additional parties and potentially resolve all disputes regarding the property in one setting.
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