Default Notices

Notice Of Default

A notice of default is a statement sent by one contract party to notify another that the latter was in default by failing to fulfil the terms of an agreement and a legal action would follow if the latter continue to default.

In the context of rental agreement, an owner can send to an occupant a notice of default to deny the occupant’s right of access to the storage space if the occupant failed to pay rent or other charges. While laws may vary from states to states, such a notice usually must include the owner's claim showing the sums due at the time of the notice and the date when the sums became due and that the occupant's right to use the storage space will be denied unless and until all sums due are paid by the occupant. The notice should also include the contact information of the owner.

In the context of mortgage foreclosure, a notice of default is a formal notice that a lender filed with courts to notify the borrower who has failed to make payments that the lender intends to conduct a sale foreclosure. The notice normally should include information about the borrower and mortgage loan and actions the lender will take.

The term notice of default refers to a public notice filed with a court that states that the borrower of a mortgage is in default on a loan. The lender may file a notice of default when a mortgagor falls behind on their mortgage payments. Information on notices of default normally includes the borrower and lender's name and address, the legal address of the property, the nature of the default, as well as other pertinent details. A notice of default is often considered the first step toward foreclosure.

KEY TAKEAWAY

• A notice of default is a public notice filed with a court that states that a mortgagor is in default.
• It is typically the final action lenders take before activating the lien and seizing the collateral for foreclosure.
• The notice must include details such as the borrower and lender's name and address, the property address, and the nature of the default.

How Notices of Default Work

A notice of default is a serious action taken by a lender. It notifies a borrower that their delinquent mortgage payments have breached the limit as outlined in their mortgage loan contract. Lenders outline the number of delinquent payments allowed in a mortgage contract before default action is taken. Most contracts generally allow up to 180 days of missed payments and delinquencies before any action is taken to file a notice of default.

A notice of default is typically the final action lenders take before activating the lien and seizing the collateral for foreclosure. A notice of default is usually filed with the state court in which the lien is recorded followed by a hearing to activate the perfected lien recorded with the mortgage closing. Some cases may allow time for the borrower to negotiate by potentially paying delinquent debt or suggesting a settlement.

If the case proceeds to the approval of the perfected property lien, the lender then notifies the borrower that the lien is activated. With an activated lien and a court order for property seizure, the lender can take legal action asking the borrower to vacate the property.

All notices of default contain relevant information pertaining to the borrower, lender, and the property. These details include but aren't limited to:

• The name and address of the borrower
• The name and address of the lender
• The legal address of the property
• Full details on the nature of the default
• What action is required to cure the default
• The deadline and the intentions of the lender if the deadline is passed without a cure

Special Considerations

If a borrower has several delinquent payments, they are at risk of default on a mortgage loan. This also poses the risk of lost collateral. When this happens, the lender may file a notice of default. While this notice may lead to foreclosure, that isn't always the case, the lender may simply be taking this step as protocol, and be willing to work with the borrower to bring the account up to date. Filing the notice may also include a negotiation grace period before further action is taken.

While some lenders use notices of default as the final step before foreclosure, others use it as a way to work with borrowers to bring the mortgage up to date.

A notice of default and subsequent foreclosure actions are documented and reported to credit bureaus. Thus, all foreclosure proceedings and actions can have serious repercussions on a borrower’s credit score. This will also reduce the borrower’s ability to obtain a mortgage or any type of debt in the future.

Some lenders may choose to serve the delinquent borrower with a notice of intention rather than a notice of default levy or they may provide warnings to the borrower which gives them time to negotiate.

What Happens After the Borrower Receives a Default Notice?

Once a borrower receives a notice of default, they have 14 days to take action. If the buyer successfully negotiates a settlement plan with the lender or pays the amount stated in the default notice within 14 days, the lender will not take legal action against the borrower.

However, if the borrower does not repay the amount in default within 14 days of receiving the notice, the lender can cancel the mortgage agreement, and the default is registered with credit bureaus. The foreclosure process then proceeds to the next stage.

Events that Follow a Default Notice

The notice of default is the final step that a lender takes before activating the lien and foreclosing on a mortgaged property. A lien is a right that the creditor has over the assets of a borrower. The creditor must register the right with the government as a declaration of their interest in the property.

Registering the lien also informs the public that the lien on the property must be released before the property can be available for sale to the public. A notice of default is filed with the state court where the lien is recorded.

Once a lender files the notice of default, the next step is to hold a hearing to activate the lien recorded with the mortgage. The hearing allows the borrower to negotiate with the lender by suggesting a settlement plan for the defaulted payments and legal fees. If the case goes to the approval stage, the lender gets the authorization to initiate the property seizure.

It means that the lender has the power to order the borrower to vacate the property within a specified period, after which the outstanding loan is written off, and the lender invites bids for the property in a public auction.