Non-Paying Borrowers: Why The Judicial Route Isn’t Always The Best

It surprises a lot of people when we say that we think foreclosure should be a last resort: after all, foreclosure processing is our bread-and-butter. But part of our ethos is to provide the best possible service to the lenders and loan servicing companies that we work with. Any time that a lender needs to recover money from non-paying borrowers, the temptation to “lawyer up” and take those borrowers to court will be strong. Our experience tells us that doing so can be a mistake. Here are some reasons to avoid taking the legal route when attempting to resolve a defaulted loan.


Taking Non-Paying Borrowers to Court is Time-Consuming

The temptation to pursue a judicial foreclosure may be strong; in California, for instance, formal judgments awarded through a judicial foreclosure may allow lenders to recover deficiencies following the sale of a foreclosed property. In other words, there’s the possibility that the entire amount of the loan can be recovered. But because the process is run through the court system, it’s beholden to the court’s schedule. In California, the timing of a judicial foreclosure typically follows that of a civil lawsuit - two to three years to complete. Working directly with the borrower allows lenders to work within the much shorter timespan dictated by the state’s nonjudicial foreclosure guidelines


Taking Non-Paying Borrowers to Court is Expensive

Along with the costs associated with the foreclosure process, taking delinquent borrowers to court adds another layer of expense. Essentially, lenders bear the costs of filing and prosecuting a lawsuit. This includes court fees and any associated costs; these can add up, especially if the case drags out over a few years. And if the lender needs to retain external counsel to pursue the case, the costs can skyrocket. Time is money, and even for those lenders who have in-house attorneys, the time they spend working on foreclosure cases in court could be better spent working on other tasks. 


There Are Other Downsides to Taking Legal Action

When the foreclosure process plays out in court, lenders face a few other problems. In California, for instance, the borrower has no right of redemption upon the conclusion of a nonjudicial foreclosure sale. Once the sale is concluded, the lender can immediately turn around and sell, develop, and/or operate the foreclosed property. But in a judicial foreclosure, once the foreclosure takes place, the borrower has a right of redemption for one year. This effectively freezes the asset for that year. One chief reason to pursue a judicial foreclosure is to recover the deficiency - but in order to prevent the borrower from claiming the right of redemption, the lender must waive its claim to a deficiency judgment. 

With all of these potential downsides, we recommend that lenders who are looking to take legal action against borrowers consider the alternatives. You may end up saving yourself a considerable amount of time, money, and effort.

At Total Lender Solutions, we advocate for lenders looking to maximize recoveries on defaulted loans. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.


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