Foreclosure vs Power Of Sale

Foreclosure is a legal proceeding in which the lender obtains a court order to terminate the right of the borrower to the property or the asset mortgaged usually due to default and recover the debt by the sale of the property. Power of Sale is a clause that is usually inserted in the agreement made at the time of execution of the loan, giving the right to the lender to reposes the property in case of a default by the borrower without getting a specific court order for this.

Foreclosure can only be carried out after a specific court order is obtained by the lender to terminate the right of redemption of the borrower. The right of redemption is the borrower’s right, meaning that the borrower can repay the complete full amount due to the lender and retain his property. The lender would generally reposes the property and conduct a public auction of it to recover his debt. This auction would be conducted in supervision of the court or its designated person. Power of Sale clause, which is included in the loan agreement would also specify the type and number of defaults that could trigger the clause. This clause would neither require a specific court order nor court supervision to execute the repossession and subsequent auction. The proceeds of the auction would first be used to clear the debt of the lender then that of any lien holders and if there is a surplus, the same would go to the borrower.

The term foreclosure, however, is interpreted in different ways in different countries or parts of the world. In places like India the term refers to the intention of the borrower to close the loan before the expiry of the term by way of prepayment of the balance amount due. The term power of sale is generally interpreted the same way everywhere.

Summary
1. Foreclosure is the procedure by which the lender obtains a court order by which he can reposes the mortgaged asset of the borrower in case of default. The Power Of Sale is a clause inserted in the loan agreement by virtue of which the lender can reposes the mortgaged property of the borrower in case of default.
2. After repossession in a foreclosure any auction or sale may only be carried out in supervision of the courts whereas in Power of Sale this may be done without court intervention.
3. The term foreclosure is interpreted differently in different parts of the world whereas the term Power of Sale generally maintains the same meaning.

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