It's hard to get equity from foreclosed home


April 27, 2003

A reader asks if it is possible for someone whose home has been foreclosed to receive any type of the equity in the house.

Dear reader:

Foreclosure is a court action brought by the holder of a mortgage or other lien on real property. When a debtor defaults, the lien holder may obtain a court order authorizing the real property to be sold to satisfy the debt.

Maryland law specifies the procedures prior to sale. The time, place and terms of sale must be advertised in a newspaper of general circulation in the county where the action is pending. Notice also must be sent to the last known address of the debtor, the record owners of the property and the holder of any subordinate interest subject to the lien.

Foreclosure sales are most often made by public auction to the highest bidder. After the sale, the trustee or other person authorized to make the sale must file a report of the sale with the court clerk. A notice of the report of sale is published in the newspaper. The debtor, or any other party interested in the sale, may file exceptions (objections) to the sale within 30 days of the notice, stating the alleged irregularity. The court may hold a hearing to consider the objections.

After exceptions have been resolved, the court issues an order ratifying the sale and refers the matter to the court auditor. After ratification, the person authorized to make the sale may legally convey the property to the one who purchased it at the foreclosure sale. Once the sale has been completed, the auditor prepares a formal accounting, listing all allowed expenses, including advertising costs, auctioneer's fees, trustee's commissions, attorney's fees and court costs. Again, any interested party may file exceptions to the auditor's account.

Sometimes, the proceeds of a foreclosure sale exceed the amount of the lien and all sale costs and expenses. At any time after the sale of property and before final ratification of the auditor's account, any person claiming an interest in the property, including a junior lien holder, may file a claim to pay that person from the surplus proceeds of sale. The auditor may allow these claims in his account.

The foreclosing creditor also may enforce a deficiency judgment against other assets of the debtor.

The reader suggests a situation where there were surplus proceeds of sale and no claims of other creditors. In such case, the court will direct the surplus proceeds to be paid to the property owner. More often, the net proceeds of a foreclosure sale are insufficient to pay the debt in full. In that case, the foreclosing party, after giving notice to the debtor, may obtain a deficiency judgment.

Foreclosures can be costly for debtors. Expenses are high. Prices at court-ordered auction sales are usually lower than private sales. When a defaulting debtor knows that foreclosure is likely, it may be a better option for the debtor to sell his or her property at a private sale.

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