Most people don’t have enough money to buy a home with cash, so they take out a loan, commonly called a "mortgage," from a bank or lending company to finance the purchase. In exchange, the borrower promises to comply with a payment schedule and agrees that the lender can sell the property at a foreclosure sale if they don't make the payments.
"Foreclosure" is the legal process that allows a lender, or the subsequent loan owner, to sell your property to satisfy the debt you owe. If you find yourself behind in mortgage payments, don’t panic. You have options for avoiding a foreclosure.
How the Foreclosure Process Generally Works
If you breach your mortgage contract by failing to make the payments, the lender can't simply kick you out of the home and take over the property. The lender generally must sell the house through one of two legal processes:
- a "judicial" foreclosure or
- a "nonjudicial" foreclosure.
However, a couple of states allow "strict foreclosures."
Judicial Foreclosures
A judicial foreclosure requires the lender to go through the state court system and receive approval from a judge to foreclose on a property. All states allow the lender to foreclose judicially.
However, some states require this process exclusively. For instance, in New York and Ohio, foreclosures are judicial.
How a judicial foreclosure begins. The lender starts the process by filing a lawsuit with the court. In the lender’s opening pleading, often called a “complaint” or a “petition,” the lender asks the court for the right to sell the home and apply the proceeds from the sale to the debt.
If state law allows for it, the complaint might also ask the court to grant a deficiency judgment if selling the property won’t fully pay off the debt. If granted, the borrower will remain responsible for the outstanding loan balance after a foreclosure sale. However, some states don't allow deficiency judgments under certain circumstances.
Responding to the lawsuit. After the lender files the court case, you may file a responsive pleading, such as an answer to the complaint or motion to dismiss the case, with the court generally within 30 or fewer days. If you don’t respond, the lender will ask the court for a default judgment and will probably automatically be declared the winner.
If you choose to file an answer, your response must be in the format described in the local court rules. For example, you’ll likely need to create a caption at the top of the first page that includes the names of the people and businesses involved in the lawsuit, the name and address of the court, and the case number. When you file an answer, you’ll include responses to each of the claims made by the lender and any defenses you might have.
It’s important to understand that filing an answer isn’t always the best choice. If you have an argument that requires you to file another pleading to preserve your rights, filing an incorrect response might cause you to lose an important right. For instance, a lender must comply with the law before a court has “jurisdiction” (authority) to hear a case. If the lender made a mistake, like failing to serve you with the lawsuit properly, you could dispute the court’s jurisdiction by filing a motion to dismiss. If you win, the lender must start over. However, if you file an answer, you are “stipulating,” or agreeing, that the court has the right to hear the matter and the case moves forward.
The bottom line is that litigation is tricky, and most people do better by getting help from a lawyer.
What happens next. The lawsuit will then likely move to the discovery stage, allowing both sides to learn about evidence in the other’s possession. Both you and the lender will be able to obtain information using discovery tools, such as:
- written interrogatories (questions about case-related facts that the other side must answer in writing)
- requests for the production of documents (a demand requiring the other party to turn over specified documents)
- depositions (the other side testifies under oath in front of a court reporter), and
- property inspections (one side views real estate or property, such as a car, that’s in the other side’s possession).
As a result of what it learns during discovery, or perhaps before, the lender might file a “summary judgment” motion, asking the judge to decide the entire matter without a trial. The lender will present its arguments and evidence in the motion.
You have the right to oppose the motion by submitting your arguments and evidence. If the court finds that you don’t have evidence supporting a defense, the lender will win the motion, obtain a judgment, and be free to proceed with a foreclosure sale. If the judge denies the lender’s motion, the court will allow the case to proceed to trial. If you lose at trial, the lender will be allowed to sell your home at a foreclosure sale.
Nonjudicial Foreclosures
To complete a nonjudicial foreclosure, the lender follows the steps outlined in state law. About half of the states allow nonjudicial foreclosures, including California, Nevada, and Arizona. Although the exact steps vary from state to state, the lender might have to:
- send you a notice of default (a notice that you’re behind on your payments)
- record the notice of default in the county records, and
- send you a notice of sale, letting you know the sale date of your home.
Some states allow the lender to send just a notice of sale, a combined notice of default and sale, or permit notification by publishing a notice in the newspaper and posting it somewhere on the property or somewhere public.
Depending on state law, you might face a deficiency judgment lawsuit following a nonjudicial foreclosure.
To fight a nonjudicial foreclosure, you or your attorney will have to file a lawsuit on your behalf.
Will My Foreclosure Be In Court or Out of Court?
If you live in one of the following states, your foreclosure will be in court: Connecticut, Delaware, New Jersey, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New York, North Dakota, Ohio, Pennsylvania, South Carolina, Vermont, or Wisconsin. Foreclosures are usually judicial in the District of Columbia, Hawaii, and New Mexico. (Nonjudicial foreclosures are allowed in those states, but that process is rarely used.)
Foreclosures are usually nonjudicial in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner asks for a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.
If state law provides a nonjudicial foreclosure process, the lender will almost always select this route because it's faster and less costly than going through court.
Mortgage or Deed of Trust? An Indicator of Whether Your Foreclosure Will Go Through Court
When you took out your home loan, you likely signed a mortgage or a deed of trust. If you signed a mortgage, the foreclosure will probably be judicial. But if you signed a deed of trust, you can generally expect the process to be nonjudicial.
You can learn whether you signed a mortgage or deed of trust by:
- reviewing the loan documents you received when you closed escrow on your home
- calling your loan servicer, or
- going to your local recorder’s office and getting a copy of the recorded document. (You might also be able to get this information online.)
Even if you signed a deed of trust, the lender could decide to foreclose judicially. And in some states, mortgages can be foreclosed nonjudicially if the document contains a power of sale clause authorizing a nonjudicial foreclosure and if state law allows it.
Why Would a Lender Choose a Judicial Foreclosure?
Under some limited circumstances, a lender might decide to use the lengthier, costlier court process even when it could use an inexpensive, out-of-court procedure. Here are a few situations when a lender who otherwise could foreclose nonjudicially might choose to foreclose through court.
The Mortgage or Deed of Trust Inadvertently Wasn’t Recorded at Origination
Filing the loan paperwork creates a lien on the home and establishes the lender's priority. Priority determines who gets paid first from the proceeds after a foreclosure sale.
But if the mortgage or deed of trust wasn’t recorded, the lender might choose to foreclose judicially to establish its priority. Similarly, if a lender accidentally released its lien, it might file a judicial foreclosure to re-establish its priority.
Lien Priority Is Unclear
Sometimes, loan documents get recorded out of order in the land records. For example, say you took out a home loan a few years ago and signed a deed of trust. Around the same time, you also took out a second loan from a different lender and signed a second deed of trust. The second deed of trust was recorded by accident before the first, which means it got priority over the first loan. In this scenario, the first lender might choose to foreclose judicially so a court can adjust the priority of the liens.
The Legal Description for the Property Shown in the Mortgage or Deed of Trust Is Wrong
If the mortgage or deed of trust doesn’t have the correct legal description for the property, the lender might ask a court to foreclose and “reform” (change) the mortgage or deed of trust.
For example, if the legal description in the document incorrectly says "Lot 8" instead of "Lot 18," the lender might file a foreclosure suit that also asks the court to fix the mistake. Similarly, the lender might file a judicial foreclosure if the property boundaries have changed.
State Foreclosure Law Changed in Some Way
States sometimes pass laws that drive lenders to change their tactics for foreclosing. For example, when Hawaii and the District of Columbia changed their laws by requiring lenders to offer mediation to borrowers in nonjudicial foreclosures, most lenders in those states switched to the judicial process to avoid having to mediate.
To Get a Deficiency Judgment Against the Borrower
Sometimes, state law allows the lender to obtain a deficiency judgment in a judicial foreclosure, but not after a nonjudicial foreclosure. Washington is an example of a state with this kind of law. So, if the lender wants a deficiency judgment, it will foreclose through the court.
What Is a Deficiency Judgment?
It’s understandable to want to walk away from a house after falling behind on the mortgage, especially when the lender is foreclosing on the property. But the problem might not disappear. The matter doesn’t always come to an end after the lender sells a house at a foreclosure auction.
If you owe more than the house is worth and your state law requires you to pay the entire balance, your lender might continue to chase after you financially. Even so, you have options. If you can’t work something out with the lender, it’s likely that you can wipe out the debt by filing for bankruptcy.
What Is a Deficiency Balance?
The proceeds of a foreclosure sale don’t always cover the entire amount owed. The difference between the sales price paid by the new owner, and the amount owed on the mortgage (plus fees and costs), leaves an unpaid mortgage balance. The balance, called a “deficiency,” might be collectible, depending on your state law, meaning that you might have to pay it.
Some states require the lender to file a separate lawsuit and to prove that the lender is entitled to the deficiency judgment—but not all. Each state develops its own set of rules that the lender must follow.
Can Your Lender Collect a Deficiency From You?
It depends. Many states are recourse states, which means that your lender can attempt to collect the deficiency balance. In nonrecourse states, such as California, a creditor can't come after you for a mortgage balance under certain circumstances.
Be aware, however, that the law can be tricky. For instance, although California homeowners won't have to pay the deficiency after a nonjudicial foreclosure, junior mortgages (such as a second or third mortgage) used for other purposes (a vacation or to consolidate bills) remain collectible. Such loans are recourse loans.
Even if your lender can pursue you for the debt, it won’t if it's too expensive to do so. For instance, if you’re judgment proof (you don’t have anything that the lender can get), the lender won’t waste money on collection efforts.
The problem is that there’s no way to guarantee that the lender won’t take action. It might hire a collection agency to badger you into paying or, if it’s believed that you have substantial assets, get a deficiency judgment from the court. The deficiency judgment allows it to take money from your paycheck by garnishing your wages or from your bank by levying against your checking or savings account.
Other Problems Could Follow You, Too
Before you leave your home, you should understand the potential liability that remains with you if something happens on your property, and it’s not just the mortgage amount. Suppose a child gets hurt on the abandoned property. As the owner of record, you’ll likely be named in the lawsuit, not the lender. Also, you’ll continue to be liable for the utilities, property taxes, and homeowners' association dues. So, it’s not just your lender that will chase you. Until the ownership changes from you to someone else, you’ll continue to accrue debt.
You might decide that it’s in your interest to stay until the foreclosure is complete or shortly before, depending on your situation. An attorney can tell you what’s best. It’s easier to prevent someone from being hurt if you’re on the property, and if you’re going to continue to incur debt, it makes sense to stay and save on rent payments.
Finding a Solution
Most lenders have loss mitigation programs, like loan modification programs, to help people. So, before you walk away, it’s important to know whether your lender will work with you. Sometimes, there’s no way to avoid the inevitable, however. If so, you can find out how to wipe out lingering deficiency debt, as well as other bills you might be stuck paying, by talking with a bankruptcy attorney.
What Is a Redemption Period in a Foreclosure?
Some states allow a foreclosed homeowner to repurchase the property after a foreclosure during a redemption period. A "redemption period" is a limited amount of time, ranging from several days to a year, depending on state law, when foreclosed homeowners can get their property back after a foreclosure sale.
About half the states provide a post-sale redemption period to foreclosed homeowners. (Also, a borrower can exercise the right of "equitable redemption" by paying off the entire mortgage balance before a foreclosure sale. Every state provides borrowers with an equitable right of redemption.)
How Long Is the Redemption Period?
The length of the redemption period, if state law provides one, varies from one state to another. State law also regularly provides different redemption periods depending on the situation. The redemption period might be:
- longer if the lender gets a deficiency judgment as part of the foreclosure
- one length for nonjudicial foreclosures and another length for judicial foreclosures
- based on how much of the mortgage loan the borrower has already paid off
- reduced if the homeowner moves out of the home before the foreclosure ends, or
- longer if the lender instead of a third party buys the home at the foreclosure sale.
How Do I Redeem the Property?
State law also sets out how much it costs to redeem the home and the procedures for redeeming.
Cost to Redeem Your Home After a Foreclosure
Generally, a foreclosed homeowner has to pay either:
- the price that the buyer at the foreclosure sale paid, plus interest and certain expenses like HOA fees and property taxes, or
- the total mortgage debt, plus interest and expenses.
How to Redeem Your Home After a Foreclosure
To redeem the property, a foreclosed homeowner usually has to give a written notice of redemption to:
- whoever bought the home at the foreclosure sale and
- the court or other party that held the foreclosure sale.
Then, the former homeowner has to pay the redemption amount to the buyer, court, or another party. State law describes what information must go in the notice of redemption and which party gets the redemption money.
Saving Your Home From Foreclosure Before the Sale
Unfortunately, most homeowners who’ve gone through a foreclosure aren’t able to come up with enough money to redeem the property afterward. Keep in mind that most lenders offer foreclosure avoidance options, like modifications, including Flex Modifications, to borrowers who are struggling to make their mortgage payments. But, usually, you must apply for help well in advance of the foreclosure sale.
Under federal law, if you submit a complete loss mitigation application more than 37 days before a foreclosure sale, the servicer can’t move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until it reviews the application and:
- lets you know that you don’t qualify for a foreclosure alternative (and your time to appeal that decision expires)
- you turn down the loss mitigation option that the servicer offers you, or
- you agree to the loss mitigation option that the servicer provides, but you fail to live up to the terms of the deal, like you don’t make the required payments during a trial modification.
Options to Avoid Foreclosure
Again, homeowners facing foreclosure have options. If you want to keep your home, you might qualify for a forbearance, repayment plan, or loan modification. If you can come up with the funds, you can redeem your home before or, depending on state law, after the foreclosure.
Or, if you'd like to exit the property without going through a foreclosure, you might be able to complete a short sale or deed in lieu of foreclosure. And yet another option is to fight the foreclosure in court.
What Is the Homeowner Stimulus Program?
The Homeowner Assistance Fund is a federal program that provides financial assistance to homeowners affected by COVID-19 so they can avoid foreclosure. The fund distributed a minimum of $50 million (much more in many cases) to every state and the District of Columbia.
Each state developed a plan and guidelines for giving financial assistance to homeowners. Generally, the money is used to pay delinquent and current mortgage payments and other housing costs. The programs and requirements differ from state to state.
The states have until September 30, 2026, to distribute the money allocated to them from this fund. But most programs plan to run out of funding long before this date, and some have already stopped accepting applications. So, if you think you might be eligible for relief, you should apply to your state's program as soon as possible.
Is Canceled Mortgage Debt Considered Taxable Income?
Losing your home to foreclosure can be stressful. It's easy to overlook the tax consequences, at least initially. If your lender cancels part or all of your mortgage debt as part of a home foreclosure, modification, short sale, or deed in lieu of foreclosure, you might have to report the canceled amount on your tax return and perhaps pay federal taxes on it.
Tax Consequences for Home Foreclosure
Typically, the lender reports the amount of any canceled debt of $600 or more to you and the IRS on a 1099-C, Cancellation of Debt form. The IRS considers the canceled debt as money in your pocket because you don't have to repay it and refers to this income as "cancellation of debt income." (That additional income might also affect your state taxes.)
Generally, you have to include the canceled debt in your income. However, an exception or exclusion might save you from having to report a canceled debt as part of your gross income and paying taxes on it.
Exceptions: When Cancellation of Debt Income Isn't Taxable
Some exceptions to the general rule that canceled debt must be included in the gross income of the taxpayer include:
- Bankruptcy. Debts that have been discharged through bankruptcy aren't considered taxable income.
- Insovency. If you're insolvent (your total debts are more than the fair market value of your total assets) when the debt is canceled, some or all of the canceled debt usually isn't taxable. Because insolvency is difficult to determine, it's recommended that you consult with a tax professional if you think you qualify for this exception.
- Some farm debts. With certain farm debts, canceled debt is generally not considered taxable income. The rules about farm debt are also complex, and you should talk with a tax professional if you think you qualify for this exception.
- Nonrecourse loans. Again, if a loan is nonrecourse, state law prevents the lender from getting a deficiency judgment against the borrower. The only thing it can do is foreclose and sell the house for payment on the debt. If you owned property that was subject to a nonrecourse debt, a foreclosure doesn't result in cancellation of debt income. But the foreclosure could result in other tax consequences if the sale results in a gain (see below.)
Does the Qualified Principal Residence Indebtedness Exclusion Apply?
Under the Qualified Principal Residence Indebtedness (QPRI) exclusion, you might be able to exclude from your taxable income most, if not all, of any canceled debt that came about because of a foreclosure, short sale, or deed in lieu of foreclosure.
You must meet certain criteria, and your mortgage debt must be canceled before January 1, 2026. (Although, debt canceled later on pursuant to a written agreement entered into before January 1, 2026, can qualify). Debt forgiven as part of a loan modification might also qualify under the QPRI exclusion.
Here are some key factors to keep in mind:
- The canceled debt had to be on your principal residence. The debt must be from a loan that you took out to buy, build, or substantially improve your home. It could also be for refinancing the mortgage on your home if those proceeds were used to make significant renovations or improvements to your principal residence, not to make purchases or pay other bills. Second homes or vacation homes don't qualify.
- Generally, only debt canceled through 2025 qualifies. But this exclusion also applies to debt forgiven thereafter if the written agreement was executed before January 1, 2026.
- As of December 31, 2020, you can exclude up to $750,000 ($375,000 if married and filing separately). Before this date, taxpayers could exclude $2 million ($1 million if you're married and filing separately).
- You have to report the amount of canceled debt on a special IRS form and attach it to your tax return.
If your canceled debt doesn't qualify under the QPRI exclusion, don't forget about the exceptions noted above.
Getting Help
You can take steps to avoid a foreclosure both before the process begins (for example, by applying for loss mitigation) and after a foreclosure officially starts (like by fighting the action in court). But not every option will work for everyone. Consider talking to a foreclosure lawyer to learn the pros and cons of your different options and find out what route might be best for your circumstances.
If you can’t afford a lawyer, a HUD-approved housing counselor is an excellent resource for information about ways to avoid a foreclosure. A housing counselor can help you work with your servicer, provide budgeting advice, and provide information about different foreclosure alternatives. HUD-approved housing counselors work for free and are well-versed in the various foreclosure-prevention programs that are available.