Foreclosures

Learn what foreclosure is and what it means as a home owner or buyer.

About

What is a foreclosure?

A foreclosure is a method of enforcing payment of a debt secured by a mortgage, deed of trust, or lien on real property by selling the real property and applying the proceeds of the sale to satisfy the debt. As a result of the foreclosure, the property owner loses all rights in the property.

What is a power of sale foreclosure?

A power of sale foreclosure is a contractual right under the terms of a deed of trust which gives the trustee the power to sell the real property on behalf of the lender if the borrower defaults. The procedure for power of sale foreclosure is contained in Article 2A in Chapter 45 of the North Carolina General Statutes. A power of sale foreclosure may not proceed unless authorized by a court after a hearing. A clerk of superior court in the county where the real property is located has authority to authorize or deny a power of sale foreclosure. A clerk of superior court may only hear and decide certain factual and legal issues in a power of sale foreclosure proceeding.

What is a foreclosure by civil action?

A foreclosure by civil action differs from a power of sale foreclosure. A foreclosure by civil action is filed in either district or superior court depending on the value of the real property subject to foreclosure. The procedure for a sale in a foreclosure by civil action is contained in Article 29A in Chapter 1 of the North Carolina General Statutes. A judge in a foreclosure by civil action has broader jurisdiction and authority than the clerk does in a power of sale foreclosure. See the Lawsuits Help Topic for more information on civil cases.

What is a tax foreclosure?

Foreclosure of a tax lien is a lawful means of collecting unpaid property taxes by a local government entity. There are two methods to foreclose a tax lien:

  1. A tax lien may be foreclosed by civil action pursuant to North Carolina General Statute §105-374.
  2. An in rem foreclosure is a method of foreclosing a tax lien pursuant to North Carolina General Statute §105-375.

There is no court hearing in this method of foreclosure prior to entry of a foreclosure judgment.  However, a person having an interest in the real property may appear before the clerk and move for the foreclosure judgment to be set aside on the ground that the tax has been paid or that the tax lien upon which the judgment is based is invalid. However, a person seeking to have the judgment set aside must appear before the clerk on the motion prior to execution on the judgment.

What is a homeowners’ or condominium owners’ association foreclosure?

Under North Carolina law, a homeowners’ association or a condominium owners’ association may file a claim of lien on real property when a homeowner does not pay assessments as required under restrictive covenants (declaration). The procedure for filing and foreclosing a claim of lien is set forth in North Carolina General Statute §47F-3-116 for homeowners’ associations and North Carolina General Statute §47C-3-116 for condominium owners’ associations. The association, acting through the executive board, may foreclosure the claim of lien in a like manner as a mortgage or deed of trust under power of sale as provided under Art. 2 in Chapter 45 of the General Statutes. An association may also choose to foreclose a claim of lien through the foreclosure by civil action process.

What is a promissory note?

A promissory note is a legal document where one party promises to pay a sum of money to another party at a fixed time, on demand, or in regular intervals. A borrower (debtor) signs a promissory note when a lender (creditor) loans money. Real property can be used as collateral to secure payment of the debt.

What is a deed of trust?

A deed of trust is a legal document whereby the owner of real property conveys legal title of the real property to a trustee held to secure a debt (loan) for a third party (beneficiary). The equitable title remains with the borrower or another individual or entity. Most deeds of trust in North Carolina contain “power of sale” language requiring the trustee to sell the property, on the request of the beneficiary, in the event of a default under the terms of a promissory note or deed of trust.

What is a holder?

A holder is a person, entity, estate, trust, partnership, etc. that is (i) in possession of a note that is (ii) payable to bearer, indorsed in blank, or payable to an identifiable person that is the person in possession. See N.C. Gen. Stat. § 25-1-201(b)(21).

What is a “mortgagee” and a “mortgagor”?

Under G.S. § 45-21.1(b)(2), the term mortgagee or trustee includes any person or entity exercising a power of sale pursuant to Art. 2A in G.S. Ch. 45. A mortgagor is a borrower who is obligated to pay the loan.

Who is the trustee or substitute trustee?

The trustee is a neutral third party that holds legal title to real property as security for a debt until the debt is satisfied.  If the borrower defaults under the terms of the note or deed of trust, for example stops making payments, the beneficiary under the deed of trust can ask the trustee to begin the foreclosure process. A beneficiary under a deed of trust may substitute one trustee for another by recording a document substituting the trustee with the county Register of Deeds.

What is a default?

A default is a borrower’s (debtor’s) failure to fulfill an obligation(s) under a promissory note, deed of trust, or homeowner’s or condominium’s association covenants, such as by failing to make required payments. A default is the trigger that allows the beneficiary under a deed of trust or a homeowner’s/condominium owner’s association to authorize a trustee to begin foreclosure proceedings.

Is free legal assistance available for foreclosure cases?

Legal Aid of North Carolina is a statewide nonprofit organization that may be able to assist some homeowners in their foreclosure cases. You can apply for Legal Aid representation by calling 1-866-219-5262 or applying online. See the Find an Attorney Help Topic for additional organizations that represent homeowners in foreclosure and more information about finding an attorney.

Before Foreclosure

Under North Carolina law, can a lender sell a property without going to court?

No. In power of sale and civil action foreclosures, real property cannot be sold without first getting a court order permitting a sale. In many cases, lenders are required to send a pre-foreclosure notice to delinquent borrowers at least 45 days in advance of filing a foreclosure proceeding, informing them of options that may be available to help them stay in their homes. Note: This response is not intended to address procedures for federal foreclosure remedies such as under the federal Single and Multi Family Mortgage Foreclosure Acts.

What resources are available to borrowers who fall behind on their mortgages?
  • Borrowers who have missed a mortgage payment or expect to miss a mortgage payment because of financial difficulties should contact their mortgage company or servicer. Borrowers may be eligible for programs designed to avoid foreclosure, such as a loan modification, forbearance, or a repayment plan.
  • HUD-approved housing counseling agencies may be able to provide assistance or work with a mortgage company to obtain a loan modification. You can view a listing of HUD-approved agencies in North Carolina here.
  • The NC Foreclosure Prevention Fund, managed by the North Carolina Housing Finance Agency, provides financial assistance to some homeowners who are having temporary difficulty paying their mortgages. You can find out more about that program here.
  • Borrowers and homeowners should be wary of solicitations from companies or out-of-state law firms that offer help to save a property. You can find information on scams involving foreclosure assistance from the North Carolina Department of Justice here.

The Court Process

What happens when a foreclosure case is filed?

A “power of sale” foreclosure is initiated when the trustee or substitute trustee files a “notice of hearing” with the clerk of superior court in the county where the subject real property is located. The matter is filed as a special proceeding. The notice provides the date, time, and location of the hearing, among other information. The notice of hearing must be served on borrowers, record property owners, and anyone else required under the deed of trust. The notice must be served in any manner provided by the Rules of Civil Procedure for services of summons, including service by the sheriff or certified mail, return receipt requested. If a party cannot be personally served, the sheriff can serve it by posting a copy of the notice in a conspicuous place and manner upon the real property.

Once a foreclosure is filed, is there still time to negotiate a solution?

Possibly. Borrowers may be able to negotiate a loan modification or other resolution at any time until the sale is final and keep the property. Borrowers will generally need to begin loan modification or other loss mitigation processes as early as possible to ensure time for processing. See above for resources for borrowers having difficulty paying their mortgages.

Who hears foreclosure cases?

In a special proceeding, the hearing is before the clerk of superior court or an assistant clerk of superior court. If the case is appealed, it will be heard by a judge. If the case is filed as a civil action, it will be heard by a judge.

What must the clerk find in a hearing to enter an order authorizing the foreclosure to proceed?

In a power of sale foreclosure, the lender must prove that it is authorized to foreclose on the real property. In order for the trustee or substitute trustee to obtain an order allowing the sale of real property, the clerk must find the existence of the following:

  1. A valid debt in which the party seeking to foreclose is the holder,  
  2. Default by the borrower,
  3. Right of the holder to foreclose under the deed of trust,      
  4. Notice of hearing to those entitled to notice,
  5. That the mortgage debt is not a home loan, or if it is a home loan, that pre-foreclosure notice under G.S. 45-102 was provided in all material respects and certain statutory time periods have elapsed, and,
  6. That the foreclosure is not barred under G.S. 45-21.12(A), a statute which provides protections in certain circumstances to specified military borrowers.
What evidence can be presented in a foreclosure case?

Evidence may include testimony of the borrowers and other witnesses, as well as written documents. In a special proceeding, the clerk of superior court may only consider evidence related to the six elements listed above, including legal defenses. This means that a borrower may argue, for instance, that the mortgage company lacks the authority to foreclose because the deed of trust does not secure the note or that the borrower is not actually in default. However, a borrower may not present equitable defenses in the special proceeding, such as that the mortgage company committed fraud or breached its contract with the borrower. In a homeowner’s or condominium owner’s association foreclosure, the homeowner may not raise equitable arguments, for instance that the association failed to fulfill its obligations to maintain the property appropriately. Equitable defenses may only be raised by filing a separate civil lawsuit to “enjoin” (stop) the sale before it becomes final. Borrowers considering potential defenses to a foreclosure should consult an attorney licensed in North Carolina.

What if a party doesn’t attend a foreclosure hearing?

Because foreclosure cases are civil, not criminal, no one is arrested for failure to appear in court. If the trustee or substitute fails to appear, the clerk of court may deny the request for foreclosure. If a borrower fails to appear at the hearing, the clerk of superior court may hear the case based on the evidence presented by the trustee or substitute trustee, lender’s attorney, or other witnesses. The clerk of superior court may enter an order allowing a trustee to proceed to sell the real property according to the sale procedures set forth in the North Carolina General Statutes.

Are continuances available in foreclosure hearings?

Continuances, or postponements of the court date, are available under some circumstances. If the debtors occupy the real property as a principal residence, the clerk of superior court must continue a hearing for up to 60 days from the date of the original hearing date if, at the commencement of the hearing, the clerk finds there is good cause to believe that additional time or additional measures have a reasonable likelihood of resolving the delinquency without foreclosure. The clerk may also continue the foreclosure hearing at the request of either party for “good cause.”

Appeals

May a foreclosure order be appealed?

Yes. Once an order is entered, there are 10 days in which to appeal the clerk’s decision to district or superior court. This requires filing a written notice of appeal. There is not a standard form for the notice of appeal. Borrowers or real property owners considering an appeal should consult an attorney licensed in North Carolina.

Does an appeal stop the foreclosure sale?

In order to prevent a foreclosure sale from moving forward while the case is on appeal, a borrower or property owner must pay a bond to the clerk of superior court. By law, if the appealing party occupies the property as a principal residence, the default bond is 1% of the principal balance due on the note, but the amount of the bond is ultimately within the clerk’s discretion. If the bond is not paid, a judge can still hear the appeal, but the trustee can proceed with a foreclosure sale before a judge decides the appeal.

What happens in an appeal?

If either the lender or the borrower appeals the clerk of superior court’s decision, there will be a new hearing before a district or superior court judge, who will decide whether the trustee or substitute trustee is entitled to proceed with the foreclosure. The judge is limited to hearing the same issues considered by the clerk of superior court, as listed above. A party who wishes to raise equitable arguments must file a separate lawsuit.

Foreclosure Sales

When does the foreclosure sale get scheduled if a foreclosure order is entered?

A date for the foreclosure sale is often, but not always, scheduled at the end of the foreclosure hearing before the clerk of superior court, if the clerk enters an order allowing the trustee to proceed with foreclosure. The notice of sale must be served according to statute and posted at the courthouse for at least 20 days before the scheduled sale date and must be advertised in a newspaper. Once scheduled, the foreclosure sale date can later be postponed or cancelled by the lender. A lender may choose to postpone or cancel the sale if the borrower is actively working with the lender to save the property.

When does a foreclosure sale become final?

A foreclosure sale can be finalized at the conclusion of the “upset bid period.” Once the foreclosure sale is conducted, there is a 10-day period in which other bidders may place a higher bid, or “upset bid,” for the real property. Each new upset bid starts a new round of bidding, and another 10-day period begins to run from the date of the most recent upset bid. Once the 10-day period passes with no further bids, the foreclosure sale may be finalized. Borrowers may consult an attorney licensed in North Carolina about their legal options during this period.

Once a foreclosure sale is complete, what happens next?

Upon completion of the sale, the trustee or substitute trustee will transfer title or ownership of the real property to the purchaser by executing a trustee’s deed. The deed will be recorded in the county register of deeds office. The trustee or substitute trustee will file an accounting of the sale proceeds with the clerk of superior court. If a property owner does not willingly vacate the property, the new owner may take legal action though the court to obtain possession, such as applying for a court order for possession or a writ of possession. Tenants occupying the real property may have additional rights and should consult with an attorney licensed in North Carolina with any questions about what rights they may have to remain in the property. G.S. 45-21.33A sets forth the effect of foreclosure on a preexisting tenancy.