Notice Of Default

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21 Aug, 2024

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Table Of Contents

What Is A Notice Of Default?

A notice of default letter is a publicly announced notice that signifies the borrower's failure to make interest payments to the lender, resulting in default. This concept holds particular significance within real estate, as it marks the initial stage of foreclosure proceedings.

Also referred to as a notice of foreclosure, this official document is formally filed with a state court. Typically, it is sent out after 120 or 180 days have transpired since the missed repayments. However, it is important to note that certain lenders may grant a grace period, providing the borrower additional time to address the outstanding debt before the lender exercises their lien rights and proceeds with collateral seizure.

What Is A Notice Of Default?

A notice of default is defined as a public notice issued to a borrower who defaults on loan repayment. The notice is filed with a court, thus activating the lender's lien over the property.
A foreclosure notice of default serves as a formal warning to the borrower that legal proceedings, such as foreclosure, may be initiated if the default is not rectified.
The borrower must take satisfactory action within 14 days of receiving the notice if they wish to own the property and maintain a good credit score.
A default notice can lead to a notice of sale, where the lender will auction off the property.

Notice Of Default Explained

Notice of default is considered the first step leading to foreclosure. The purpose of this notice is to protect the interests of lenders. Loans, especially mortgages, are pretty common. The notice is filed with the court when the mortgagor or the borrower fails to make interest payments towards the loan for more than 120 or 180 days from the payment date.

The intent may differ. Some lenders might only want to warn the borrowers that they will make the next move if the payment is not made within a few specified days. However, some lenders might not give this concession. Yet others might even stick the notice on the property's door or walls to shame the borrower publicly. So what happens after a notice is sent?

When the notice is filed in court, the lender can activate the lien or their interests in the property. When this happens, the lender has powers over the property and can even ask the borrower to vacate. Then, the borrower can either try to pay off the full amount or the interest payments as required by the lender, or they can try to sell their property and pay off the loan. The action should be initiated within 14 days of receiving the notice.

If the options mentioned above do not work, the lender will send a notice of sale to the borrower stating that the house will be auctioned. This usually happens after 90 days of the notice of foreclosure. The lender will sell the house to the best bidder. The property is passed on to the bank or the lender if there are no satisfactory bids.

The borrower can only stop this by paying off the full mortgage amount. Also, the lender can cancel the mortgage agreement within 14 days of sending the notice if the payment is not made in full.

It is important to remember that such a notice has the potential to harm the borrower's credit score, making it difficult for them to obtain loans and credit facilities in the future. There are various laws related to default notices and timelines. It varies according to the state. For example, California has stricter foreclosure laws.

Examples

Let's study a few examples.

Example #1

Here's an example of a notice of default in California. Suppose Sam took a mortgage from his bank to buy a condo for $1 million. He had to pay interest at 6% every month. However, he defaulted on his October 2022 payments. The bank contacted Sam and asked him to pay the interest soon. However, despite repeated warnings and calls, he did not pay his interests for November, December, and January 2023. The bank then sent him a default notice. After receiving no response from Sam for over two weeks, the bank issued a notice of sale and auctioned off his house.

Example #2

Voyager Digital, a cryptocurrency brokerage firm, issued a default notice to Three Arrows Capital (3AC), a cryptocurrency hedge fund, in June 2022. The latter had borrowed a loan of bitcoins amounting to approximately $324 million and a stablecoin, USDC, worth $350 million. Following this and their inability to pay off the loan, 3AC filed for Chapter 15 bankruptcy.

In June 2022, Voyager Digital, a prominent cryptocurrency brokerage firm, issued a formal default notice to Three Arrows Capital (3AC), a well-known cryptocurrency hedge fund. The default notice was prompted by 3AC's failure to fulfill their financial obligations related to a substantial loan they had obtained.

The loan, consisting of 15,250 bitcoins with an approximate value of $324 million and a significant amount of USDC stablecoin worth $350 million, was granted to 3AC. Unfortunately, despite reasonable opportunities, 3AC encountered difficulties repaying the loan within the agreed-upon terms.

Consequently, due to their inability to meet their loan obligations, 3AC was compelled to file for Chapter 15 bankruptcy. This particular bankruptcy filing is notable as it pertains to international cases.

The example highlights the significant financial implications arising from the default notice issued by Voyager Digital, leading to the subsequent bankruptcy filing by Three Arrows Capital.

Letter Sample

A notice of default letter contains the following information:

Names of the borrower and lender
Addresses of the borrower and lender
Property address
Nature of the default
Required action
Deadline and the following action.

Here's a sample:

Lis Pendens vs Notice Of Default

Lis pendens is another important concept in real estate law. Like a default notice, it is also a public notice stating that a lawsuit is pending against a particular property.
Lis pendens is a Latin word that translates to 'suit pending.'
Lis pendens is a legal suit specifically against a particular property with the liability attached to the owner. But a default notice is filed against the owner for failing to adhere to an existing agreement.
In lis pendens, the existing litigation is transferred from one owner to the next. Naturally, therefore, it also acts as a warning for prospective homebuyers. But a default notice usually poses no problems for the next homeowner.
The lender specifically files a default notice with a lien over the property. But anyone can file a lawsuit on valid grounds (divorce, foreclosure, and other legal disputes). But the party will not have any rights over the property unless otherwise authorized by the court.

Frequently Asked Questions (FAQs)

1. How to find notice of default properties?

Prospective buyers can check any liabilities, such as default notice, lis pendens, etc., on an interested property by checking the county's public records. These records can be accessed for free, online or offline.

2. When is a notice of default issued?

A default notice is issued to a mortgagor or borrower when they default on their interest payments for more than 120 or 180 days, depending upon the state. Some states mandate a minimum of 30 days from a missed payment before sending a notice. The lender or the bank is also legally required to make timely warnings before filing for the notice.

3. Does a notice of default expire in California?

No. A notice of default in California does not expire. Instead, it can be replaced by a notice of rescission, reconveyance, or sale, depending upon the situation. The notice of sale, however, will expire in a year.