Judicial Foreclosure

• In about half of the states in the United States, the only way for a mortgage lender to foreclose on commercial property is to file a lawsuit in court against the mortgage borrower. The lender begins the lawsuit by filing a complaint and then serving a copy of the complaint and a summons on the mortgage borrower. The lawsuit can then take one of a few different paths, depending on the response of the borrower. The lawsuit may be quick, or it may drag out for several months or even years.
  
  

Response

• The summons will indicate a time frame within which the borrower must provide a formal response to the complaint. To do this, the borrower files an answer, or answer to complaint, with the court. The answer is the document in which the borrower admits or denies the allegations of the lender's complaint. It is also the place where the borrower raises any affirmative defenses to foreclosure. For example, if the mortgage lender had previously agreed not to foreclose, but has now reneged and is foreclosing anyway, the borrower can raise this defense in its answer.
  
  

Judgment

• One way or another, the foreclosure lawsuit will result in a judgment. If the borrower does not file an answer then the lender will simply obtain a default judgment. If the borrower does file an answer, the lawsuit will likely end up in trial and a judge or jury will enter a judgment against either the borrower or the lender. A judgment in favor of the lender will order the local sheriff's department to hold a foreclosure sale of the commercial property. This is essentially a public auction, administered by the sheriff's department, where the commercial property will be sold to the highest bidder.
  
  

Deficiencies

• Most state laws allow mortgage lenders to collect deficiencies on commercial property foreclosures. A deficiency results when the collateral property does not sell for a high enough price to fully pay off the total amount due on the mortgage loan. For example, if you owe $300,000 on your office space, but the foreclosure sales price is only $200,000, then the lender may be able to come after you for the $100,000 deficiency. At this point, it becomes critical to understand whether you personally signed the mortgage loan documents. If you signed the promissory note in your individual capacity, or if you signed a personal guarantee, then you may be personally responsible for the deficiency. But, if everything was done solely through your business entity, then only your business entity will be liable for the deficiency.