JUDICIAL AND EXTRAJUDICIAL FORECLOSURE OF

PROPERTY

Submitted by:

JOSEFINA O. AMBONG
MB515A Business and Employment Laws
University of Batangas- Lipa Campus
Ist Semester 2011-2012

ATTY. RICARDO MANALO II

MB515A Business and Employment Laws

September 10, 2011

Judicial and Extra Judicial Foreclosure of Assets

JUDICIAL AND EXTRAJUDICIAL FORECLOSURE OF MORTGAGE

A mortgage is a contract of security for the payment of a debt or the
performance of a duty and that will become void upon payment or
performance according to the stipulated terms. It is also defined as a
lien against property that is granted to secure an obligation (such as a
debt) and that is extinguished upon payment or performance according
to stipulated terms.
Foreclosure, on the other hand, is the a legal proceeding to terminate
a mortgagors interest in property, instituted by the lender (the
mortgagee) either to gain title or to force a sale in order to satisfy the
unpaid debt secured by the property.
The right to foreclose the mortgage and to have the
property seized and sold with a view to applying the
proceeds to the payment of the principal obligation
A mortgage contract may contain an acceleration clauseon
occasion of the mortgagors default, the whole sum
remaining unpaid automatically becomes due and payable
Essence of mortgage contractproperty has been
identified and separated from a mass of the property of the
mortgagor to secure the payment of a principal
Once the proceeds have been applied to the payment of
the principal obligation, the debtor cannot anymore be asked
to pay unless there is deficiency
Demand is essential before foreclosure may be effected.
If the demand was made and duly received by the mortgagor
and the latter still
did not pay, then they were already in default
and foreclosure was proper. However, if demand was not made, then
the loans had not yet become due and
demandable. This meant that
the mortgagor had not defaulted in their payments and the
foreclosure by the mortgagee was premature. Foreclosure is valid only
when the debtor is in default in the payment of his obligation.
1. JUDICIAL FORECLOSURE OF MORTGAGE
Judicial foreclosure is the method by which the mortgaged real property
is sold through a court proceeding requiring many standard legal steps
such as the filing of a complaint, service of process, notice, and a
hearing.
Judicial and Extra Judicial Foreclosure of Assets

Under Act 3135, titled An Act to Authorize the Mortgage of Private Real
Property in Favor of Any Individual, Corporation, or Association Subject
to Certain Conditions as amended by Act 4118, provides that:
x x x Section 1. Any provision of law to the contrary notwithstanding,
private real property may be mortgaged in favor of any individual,
corporation, or association, but the mortgagee or his successor in
interest, if disqualified to acquire or hold lands of the public domain in
the Philippines, shall not take possession of the mortgaged property
during the existence of the mortgage and shall not take possession of
the mortgaged property except after default and for the sole purpose
of foreclosure, receivership, enforcement or other proceedings and in
no case for a period of more than 5 years from actual possession and
shall not bid or take part in any sale of such real property in case of
foreclosure: Provided, that said mortgagee or successor in interest may
take possession of said property after a default in accordance with the
prescribed judicial procedures for foreclosure and receivership and in
no case exceeding 5 years from actual possession. x x x
1. A Filipino resident can mortgage to a foreigner, because it is
sanctioned by R.A. 133. Ownership is not equivalent to mortgage.
Nonetheless, said party can only institute judicial proceedings but not
extra judicially foreclose the mortgage. He cannot bid or take part in
the sale of the real property.
2. The foreigner may not take possession of the property during the
mortgage. He can only possess the same as a lessee.
3. The foreigner may only take possession of the mortgaged property
after default, and for the sole purpose of foreclosure, enforcement or
other proceedings. This, should not exceed the period of 5 years from
actual possession.
STEPS TO BE UNDERTAKEN DURING THE JUDICIAL
FORECLOSURE OF MORTGAGE UNDER Rule 68 OF THE RULES OF
COURT1:
1. The mortgagee should file a petition for judicial foreclosure in the
court which has jurisdiction over the area where the property is
situated;
2. The court will thereafter conduct a trial. If, after trial, the court
finds merit in the petition, it will render judgment ordering the
mortgagor/debtor to pay the obligation within a period of neither
less than 90 nor more than 120 days from the finality of
judgment.

Judicial and Extra Judicial Foreclosure of Assets

3. Within this required period, the mortgagor is given the

opportunity to pay the obligation to prevent his property from
being sold. This is called the Equity of Redemption period.
4. If mortgagor fails to pay within the 90-120 days given to him by
the court, the property shall be sold to the highest bidder at
public auction to satisfy the judgment.
5. There will be a judicial confirmation of the sale. After the
confirmation of the sale, the purchaser shall be entitled to the
possession of the property, and all the rights of the
mortgagor with respect to the property are severed or
terminated. The equity of redemption period actually extends
until the sale is confirmed. Even after the lapse of the 90 to 120
day period, the mortgagor can still redeem the property, so long
as there has been no confirmation of the sale yet. The equity of
redemption can be considered as the right of the mortgagor
to redeem the property BEFORE the confirmation of the sale.
a. After the confirmation of the sale, the mortgagor does
not have a right to redeem the property anymore.
This is the general rule in judicial foreclosures there is no right
of redemption after the sale is confirmed.
DISPOSAL OF THE PROCEEDS OF THE SALE OF THE PROPERTY
a. First, the costs of the sale will be deducted from the price at
which the property was sold
b. The amount of the principal obligation and interest will be
deducted
c. The junior encumbrances will be satisfied
d. If there is still an excess, the excess will go back to the
mortgagor. In mortgage, the mortgagee DOES NOT get the
excess (unlike in pledge).
If there is a deficiency, the mortgagee can ask for a DEFICIENCY
JUDGMENT which can be imposed on other property of the
mortgagor. The rule on extrajudicial foreclosure is different.
The mortgagee must go to court and file another action for the
collection of the deficiency.
DISADVANTAGES OF JUDICIAL FORECLOSURE:
1. Judicial foreclosure is costly, since the parties would need to hire
lawyers. But then again, the present rules provide that court
fees are needed to be paid in extrajudicial proceedings also.
2. The parties have very little control over the sale because there is
court intervention.

Judicial and Extra Judicial Foreclosure of Assets

3. More susceptible to stalling/dilatory tactics by the

mortgagor, since he can file all sorts of motions in court to
prevent the sale.
It is more efficient to have extrajudicial proceedings since for
judicial proceedings; there is a minimum lapse of time of 6
years.

2. EXTRAJUDICIAL FORECLOSURE
Extrajudicial foreclosure is the process by which the mortgage property
is sold at a no judicial public sale by a public official, the mortgagee, or
a trustee, without the stringent notice requirements, burdens or delays
of a judicial foreclosure.
Sale cannot be made legally outside the city or province wherein
the property sold is situated. The extrajudicial foreclosure shall be
made in the municipal building of the said place of the stated property.
(Act No. 133 and 4118 and Supreme Court Administrative Circular)
The following are the procedures for extrajudicial foreclosure:
1. Notice of Sale
Posting of the notices of the sale must at least be for 20 days, in at
least 3 public places of the municipality or city where the property is
situated.
If the property is once a week circulation in the longer necessary
worth more than P400.00, such notice shall also be published for at
least 3 consecutive weeks in a newspaper of general municipality or
city where the subject property is located. It is no to count 6 days
between publications.
Note:
Existing jurisprudence holds that for purposes of
judicial foreclosures,
there is sufficient notice when there
is publication.
2. Public Auction/Sale
Time for public auction shall be between 9:00 a.m. and 4:00 p.m.
It shall be made under the direction of the sheriff of the province, the
justice or auxiliary justice of the peace of the municipality, or of the
notary public of the municipality, who shall be compensated with P5 for
each day of actual work or performance in addition to his expenses.

Judicial and Extra Judicial Foreclosure of Assets

Any person may bid at the sale, unless there are stipulations in the
agreement.
3. Possession

Upon foreclosure, if the mortgagor is in possession of the

property, he will retain possession during the redemption
period1 year from the date of sale
If the winning bidder wants possession during the
redemption period, he may execute a bond in the amount
equivalent to the use of the property for 12 months, to
indemnify the debtor in case it be shown that the sale was made
without violating the mortgage or without complying with the
requirements of the Act. Upon approval, a writ of possession will
be issued in his favor.
If the winning bidder is able to secure possession, the
mortgagor may petition that the sale is set aside and the writ of
possession be cancelled on the ground that he wasn't in
default or that the sale wasn't made in accordance with
Act 3135. This must be filed within 30 days from issuance of
the writ of possession.

4. Right of Redemption
The debtor, his successors-in-interest, or any judicial creditor
or judgment creditor of said debtor, or any person having a lien
on the property subsequent to the mortgage or deed of trust
under which the property is sold, may redeem the same at
any time WITHIN THE TERM OF 1 YEAR FROM AND AFTER THE
DATE OF THE SALE and such will be governed by the Rules of
Court

When the property is redeemed after the purchaser has

been given possession, the redeemer is entitled to deduct from
the price of redemption any rentals that said purchaser
may have collected in case the property or any part thereof was
rented. If the property was used as his own dwelling, it being
town property, or used it gainfully, it being rural property, the
redeemer may deduct from the price the interest of 1% per
month provided in the Rules of Court.

Other pertinent provisions governing extrajudicial

foreclosure (Rules of Court, rule 39, Section 29 to
31, and 35:
Sec. 29. Effect of redemption by judgment obligor, and a certificate to
be delivered and recorded thereupon; to whom payments on
redemption made. If the judgment obligor redeems, he must make the

Judicial and Extra Judicial Foreclosure of Assets

same payments as are required to effect a redemption by a

redemptioner, whereupon, no further redemption shall be allowed and
he is restored to his estate. The person to whom the redemption
payment is made must execute and deliver to him a certificate of
redemption acknowledged before a notary public or other officer
authorized to take acknowledgments of conveyances of real property.
Such certificate must be filed and recorded in the registry of deeds of
the place in which the property is situated, and the registrar of deeds
must note the record thereof on the margin of the record of the
certificate of sale. The payments mentioned in this and the last
preceding sections may be made to the purchaser or redemptioner, or
for him to the officer who made the sale.
Sec. 30. Proof required of redemptioner.
A redemptioner must produce to the officer, or person from
whom he seeks to redeem, and serve with his notice to the officer a
copy of the judgment or final order under which he claims the right to
redeem, certified by the clerk of the court wherein the judgment or
final order is entered; or, if he redeems upon a mortgage or other lien,
a memorandum of the record thereof, certified by the registrar of
deeds; or an original or certified copy of any assignment necessary to
establish his claim; and an affidavit executed by him or his agent,
showing the amount then actually due on the lien.
Sec. 31. Manner of using premises pending redemption; waste
restrained. Until the expiration of the time allowed for redemption, the
court may, as in other proper cases, restrain the commission of waste
on the property by injunction, on the application of the purchaser or
the judgment obligee, with or without notice; but it is not waste for a
person in possession of the property at the time of the sale, or entitled
to possession afterwards, during the period allowed for redemption, to
continue to use it in the same manner in which it was previously used;
or to use it in the ordinary course of husbandry; or to make the
necessary repairs to buildings thereon while he occupies the property.
Sec. 35.
Right to contribution or reimbursement.
When property liable to an execution against several persons is sold
thereon, and more than a due proportion of the judgment is satisfied
out of the proceeds of the sale of the property of one of them, or one of
them pays, without a sale, more than his proportion, he may compel a
contribution from the others; and when a judgment is upon an
obligation of one of them, as security for another, and the surety pays
the amount, or any part thereof, either by sale of his property or before
sale, he may compel repayment from the principal.
General Banking Law of 2000, Section 47
Sec. 47. Foreclosure of Real Estate Mortgage.

Judicial and Extra Judicial Foreclosure of Assets

In the event of foreclosure, whether judicially or extra-judicially, of any

mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property
has been sold for the full or partial payment of his obligation shall have
the right within one year after the sale of the real estate, to redeem the
property by paying the amount due under the mortgage deed, with
interest thereon at rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the sale and custody
of said property less the income derived there from. However, the
purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take
possession of such property immediately after the date of the
confirmation of the auction sale and administer the same in
accordance with law. Any petition in court to enjoin or restrain the
conduct of foreclosure proceedings instituted pursuant to this provision
shall be given due course only upon the filing by the petitioner of a
bond in an amount fixed by the court conditioned that he will pay all
the damages which the bank may suffer by the enjoining or the
restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being
sold pursuant to an extrajudicial foreclosure, shall have the right to
redeem the property in accordance with this provision until, but not
after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three
(3) months after foreclosure, whichever is earlier. Owners of property
that has been sold in a foreclosure sale prior to the effectivity of this
Act shall retain their redemption rights until their expiration.
Some important notes regarding foreclosure of mortgage:
1. 1. For judicial foreclosure, the redemption period is within
one year. For extrajudicial, its 90 days from sale or
registration.
2. The purpose is to give concession to the banks. Banks
cannot get properties mortgaged by those in financial
distress.
3. The redemption price would be the mortgaged obligation
plus the interest as stipulated in the original obligation.
Compare this with judicial foreclosure wherein the
redemption price is the original price. In this Case, you have
to pay more when redeeming from a bank.
4. There is immediate possession
5. A motion to enjoin would not be entertained unless secured by a
bond.

Judicial and Extra Judicial Foreclosure of Assets

6. Court will fix the amount of the bond. Normally, this

would be the liability of the bank plus costs. This
remedied the loopholes in Act 3135protect the bank during
foreclosures.
This makes it hard to secure injunctions
and it shortens the redemption period.

pp 225 Foreclosure of Real Estate Mortgage Rules of Court, RBSI

Editorial Staff, 2008 Edition

Judicial and Extra Judicial Foreclosure of Assets