Strict Foreclosure in Vermont: Know Your Rights

The foreclosure process varies depending on which state your real estate is in. If you’re currently going through a foreclosure, it's important to know your state laws and available protections. Vermont, for example, is one of the few states that allows strict foreclosures.

This article explains Vermont’s strict foreclosure process and how deficiency judgments work. It also outlines what the right of redemption is and how it works in Vermont. Finally, we’ll provide some helpful resources you can use to explore your foreclosure options. 

Foreclosure Processes

Foreclosure is a legal process lenders can use when borrowers fail to make mortgage loan payments or pay property taxes and homeowners association (HOA) fees. In a foreclosure, the lender takes back, or repossesses, the home and sells it to recoup the amount the borrower owes on the loan. Lenders generally start the foreclosure process when the mortgage is more than 120 days delinquent. This is because lenders are prohibited by federal law from starting any earlier except in a few limited circumstances.

While foreclosures vary by state and the type of property, there are three general types of foreclosure actions: judicial, nonjudicial, and strict foreclosure.

All states have judicial foreclosures. Lenders initiate the judicial foreclosure process by filing a complaint in court. Borrowers then have 30 days to respond to the complaint with an answer. If you don't respond, the court will grant a foreclosure and set a sale date. The sale usually happens in an auction where the highest bidder gets the home.

Not all states allow nonjudicial foreclosures. As the name implies, these foreclosures don’t generally involve court action. If you're facing a nonjudicial foreclosure, you’ll receive a notice of default, which tells you how long you have to resolve the default by catching up with payments. If you don’t resolve the default, the lender will issue a notice of sale. Nonjudicial foreclosures also generally require the lender to sell the property at a public auction.

Only a few states allow strict foreclosures. Strict foreclosures are similar to judicial foreclosures in that they require the lender to file a lawsuit. The court then gives the borrower a specific timeline to pay the mortgage. If they can't pay, the court awards the lender with full legal title of the property without any foreclosure sale or auction taking place.

Like judicial foreclosures, strict foreclosures require court involvement. But unlike judicial foreclosure, in a strict foreclosure, the lender isn’t required to sell the home at auction. The court simply gives ownership and the home’s legal title to the lender. 

How Foreclosures Work in Vermont

Under federal law, mortgage servicers must generally wait to initiate a formal foreclosure process until the homeowners are more than 120 days past due on their payments. Once that time has passed, they can start the foreclosure process. To understand this process, it's important to understand some of the documents borrowers sign when financing their homes. Two important documents are the promissory note and the deed of trust. 

The promissory note can be understood as a legal IOU. It’s a written document in which the borrower promises to pay back the borrowed amount. The other document is a deed of trust, which is available in some states. It's similar to a mortgage in that it creates a lien on the property. By creating a lien, lenders can secure the loan amount by using the house as collateral if the borrower doesn’t pay back the loan. 

A deed of trust is similar to a mortgage in some ways. But it differs in how it divides the title between the lender and the borrower. In a deed of trust, the borrower is given an equitable title or a right to own the property. The legal title, or actual ownership, is given to the lender who acts as a beneficiary. Because the lender holds the legal title in a deed of trust, they have the power to sell the house without having to go to court. 

Vermont Foreclosure Laws

Foreclosure laws and processes differ by state. In Vermont, lenders can use a judicial or strict foreclosure process to foreclose on Vermont-based property. Either way, the lender has to file a lawsuit in state court. 

Vermont law allows strict foreclosures if the value of the property is less than the debt amount. This means the home is underwater. If a homeowner wishes to have an auction instead of an automatic transfer of legal title they can file a motion for judicial foreclosure. This motion asks the courts to auction the house to the highest bidder. The advantage of this is that you may end up with a buyer who pays a higher amount than the fair market value of the property. 

Deficiency Judgements 

Vermont, like many states, allows lenders to pursue a deficiency judgment against the borrower if the sale price of the house or its fair market value doesn’t cover the full amount of the mortgage debt. A deficiency judgment is a personal judgment for the difference between the sale price of the house and the total debt owed. Following a strict foreclosure, lenders can get a deficiency judgment by filing a separate lawsuit against the borrower. Lenders must show the court that the house was sold at the price of similar homes in the neighborhood. 

Once a mortgage company gets a deficiency judgment it will generally take steps similar to other creditors to collect the judgment. Lenders may work with debt collection agencies, use wage or bank account garnishment, or place a lien on your property. Bank account garnishment is a court order that freezes your bank account and allows the creditor to remove money directly from your account to cover your outstanding debt. 

Similarly, wage garnishment is a court order that requires your employer to withhold wages from your paycheck to cover your outstanding debts. While state rules vary, federal law limits wage garnishment to a maximum of 25% of your disposable earnings.

Creditors may also place a lien on your property. This is through a court ruling that provides the creditor with a judgment lien. A judgment lien allows the creditor to take possession of the borrower's property if they fail to repay the amount. 

Right of Redemption 

If you want to stop your property from being foreclosed, one possible way is to redeem your property. This is known as the right of redemption. It requires the borrower to pay the creditor the outstanding mortgage debt and any other costs or expenses. Vermont allows redemption in strict foreclosures if the borrower can redeem the property within six months of the court issuing the foreclosure decree. This discloses the amount of outstanding debt owed on the mortgage. 

The court is allowed to order a shorter redemption period. Additionally, the borrower and lender may agree to a shorter period as well. If the redemption period ends and the borrower hasn’t paid off the outstanding mortgage balance and all associated foreclosure costs, they’ll be required to vacate the property. 

Seeking Foreclosure-Related Assistance 

Foreclosure is stressful. It's important to learn about your options. Speaking to an experienced foreclosure attorney can help you learn more about your rights. Additionally, you may consider making an appointment with a U.S. Department of Housing and Urban Development (HUD) counselor. They can give you free or low-cost advice about your options. 

Let's Summarize...

There are three main types of foreclosures: judicial, nonjudicial, and strict foreclosure. The type of foreclosure you might face will depend on your state and also your mortgage documents, including the promissory note and deed of trust. Vermont is one of few states that allows strict foreclosures. If a lender does a strict foreclosure, they must go through the court, but they don’t have to hold a foreclosure sale. If you want your home sold at auction, you can file a motion to request this. Lenders can pursue borrowers for any remaining deficiency balance after a foreclosure sale. You do have the right of redemption in Vermont, which means you can reclaim your home if you can pay off the mortgage debt within six months of the foreclosure.