It's common to think of a house, building or a parcel of land when you hear the term "foreclosure." You may not realize it, but foreclosure may also be used to get possession of someone's personal property, too, like a car for example.

While the same word describes both situations, the rules for personal and real property foreclosures are very different.

Some Foreclosure Basics

With any foreclosure, the key is the security interest you (the debtor) give to a creditor. Basically, it gives the creditor rights to the property in exchange for lending you the money you need to buy it. A home mortgage loan or car loan are good examples.

If you don't repay the loan as promised (called default), the lender will probably exercise its right to foreclose - take back the property and sell it to pay off your debt.

The Rules for Retaking Property

Personal Property

With personal property, foreclosure rules generally follow your state's version of the Uniform Commercial Code (UCC). It's a set of rules covering the sales of goods and other types of transactions. The rules may vary by state, but in general, after default, a secured lender may:

  • Take possession of the property (called collateral) and sell it at a public or private sale, or
  • Lease, license or otherwise dispose of any or all of the collateral

The lender must be able to show that it acted in a commercially reasonable manner when selling the property. For instance, you need to be told about the sale and given a chance to pay what you owe, and it has to be sold for a fair price. From repossession to sale, it usually doesn't take a long time for the process to run its course.

Real Property

With real property, the foreclosure rules are usually completely different and much stricter. And, unlike with personal property, it may be months, even a year, before a real estate foreclosure is completed.

Again, the rules vary greatly from state to state. In general, though, the foreclosure process on real property involves:

  • The lender giving you a written notice of default, which will likely come by certified mail
  • Your being given a period of time after proper notice pay the lender the amount required to cure the default and to reinstate your loan
  • The lender electing to proceed with foreclosure, usually either through a judicial or nonjudicial foreclosure
  • The lender sending you a notice of foreclosure sale
  • A public sale being held by auction where the highest bidder can buy your property
  • If no one bids enough, the lender may buy the property with a credit bid based on the amount you own on your mortgage
  • If the lender ends up with the property, it usually will resell it later in a private sale
  • If you haven't vacated the property by the time of the foreclosure sale, it's likely an unlawful detainer lawsuit will be filed to evict you from the home

Mixed Property

A different set of rules apply for mixed collateral - something that's both real and personal property. A hotel is a good example - it has real estate (the building and land) and personal property, such as furniture. Generally, the UCC lets a lender foreclose on both types of property at the same time.

Stopping a Foreclosure

No matter if the foreclosure involves real or personal property, as a general rule you usually can stop the foreclosure process and keep the property if you pay off the loan and any costs and expenses the lender had in connection with the foreclosure action.

You may be able to at least temporarily stop a foreclosure by:

  • Asserting a defense - for example, that the foreclosure process is not being handled in a commercially reasonable manner or according to the rules set out by the laws in your state
  • Filing bankruptcy, which imposes an automatic stay that stops the foreclosure process unless and until the lender gets permission from the bankruptcy court

But you have to be realistic here. Keep in mind that the laws in all states give lenders many rights when it comes to protecting their security interests.

Regardless of the type of security or the property involved, make no mistake about it: If left with no other option of getting their money back, lenders can and will foreclose and sell the property to pay off a loan that's in default.

The good news, though, is that lenders don't like foreclosures because they're costly and difficult. So, they're usually willing to work with you to find a way to avoid foreclosure in the first place.

Questions for Your Attorney

  • Can I bid on my property if it's sold at auction or public sale after foreclosure? Can the lender refuse to sell it back to me if I have the winning bid?
  • What can I do if a lender forecloses on personal property that I and my soon-to-be ex-spouse own jointly but she failed keep up with the payments?
  • Can my bank force me to leave my house once it starts to foreclose?