An Overview of the Judicial Foreclosure Process
Judicial Foreclosure Generally
In the instance of an Owner delinquent on paying association assessments, the Board of Directors has a variety of methods to attempt to recover such assessments. While the methods may vary by the specific declaration of the association, common remedies include repayment plans, bank garnishments, wage garnishments, receivership and judicial foreclosure.
Generically, a foreclosure is a legal process in which a lender attempts to recover a balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as collateral for the loan. In the HOA context, it a legal process in which the Association attempts to recover a balance due (normally assessments) from an Owner who has stopped making payments to the HOA by forcing the sale of the property.
Judicial Foreclosure is a process similar to a bank-initiated foreclosure. The difference is that, where banks have the power of sale over the property via the mortgage contract with the Owner, the Association must process its foreclosure request through a state court.
When Is a Judicial Foreclosure Desirable?
A judicial foreclosure is desirable when other collection remedies have been (or would be) ineffective against the Owner. If an Owner: cannot or will not enter into a payment plan, does not have sufficient bank savings to cover the default assessments (and related fees and costs, including attorneys’ fees), does not have a sufficient wage to cover the default assessments, or still resides in the unit and a receiver cannot be appointed, judicial process may be a viable option.
The Legal Process
Prior to filing a Complaint for Foreclosure, the Association needs to adhere to existing collection policy, including providing proper notice to the Owner and properly filing an association assessment lien. HB13-1276, effective 1/1/2014, additionally requires that the Board must resolve, by a recorded vote, to authorize foreclosure against the specific unit.
After filing the Complaint, normal rules of civil procedure control. There will be a period of discovery in which the parties exchange relevant information. This includes the obligations of the Owner as described in the declaration, a current ledger of the default assessments (and associated fees and costs), and the identity of any people with material information (e.g. the property manager). A hearing will be set in which the Association’s counsel will attempt to prove the amount of default assessments. Achieving that goal, the court will authorize the foreclosure sale.
The Foreclosure Sale
Setting Up the Sale
The Association’s counsel will prepare and submit paperwork to the County Sheriff to help set up the foreclosure sale. The sale is normally held within four months after such paperwork has been provided.
At least 48 hours prior to the sale, the Association is required to place a bid on the property. Assuming sufficient equity in the property, the Association’s bid amount is normally the sum of the default assessments and related costs and fees, including attorneys’ fees. If there is not sufficient equity to cover such sum, the Association may make a deficiency bid; normally, this bid is for the value of any equity in the property. The Association should specify the amount of the deficiency (the difference between the amount of equity and the amount due to the Association) in their bid, as it may be able to proceed via a different collection method against the Owner for any remaining monies due.
Foreclosure sales are open to the public and oftentimes attract investors. Assuming that the Association placed a bid for the amount owed to it, any bid higher than that amount will pay off the Association’s entire balance. If no other bids are placed, the Association becomes the owner of the property. A title is issued by the sheriff within nine days following the sale.