Unsecured creditors almost never have foreclosure rigths on your property. Foreclosure is available in two situations — when the property was made security (collateral) for a debt, such as for a mortgage or home equity loan, and when property taxes are not paid. In the former case, the right to foreclose is essentially a contract right: the homeowner agrees to give the lender the right to foreclose if the debt is not paid, as a way of inducing the lender to extend credit or a loan. The security interest creating the foreclosure right is therefore something offered as consideration for the loan agreement and is voluntarily assumed by the borrower.
Inevitably, there are important stipulations to any rules. For example, many community associations have been given the rights of secured creditors, and may foreclose in almost all states if dues and assessments are not paid. In this case, community associations are treated as though they are municipalities, and may be able to force a sale. A hospital, however, is not able to act in the same way, and cannot force a foreclosure since it is not, under almost all situations, a creditor whose claim is secured by real estate.
By law, local government has the right to foreclose on property (in some parts of the country called “Sheriff's Sales”) on which property taxes have not been paid.
However, other debts, if not paid, do not result in the right to foreclose. In particular, an unsecured debt is one that has no property or assets acting as a security or collateral; there is no inherent right to take someone’s assets to satisfy his unsecured debt.
However, if a lender sues a borrower for an unpaid debt and wins, the lender can then—if the borrower still doesn’t pay up—access a number of different tools or techniques to ensure repayment. One tool is to get a court-ordered lien on the borrower’s home. However, a judgment lien is not to be confused with a mortgage/security interest in the property. The judgment lien means that if the property is sold, proceeds of the sale (if there are proceeds; i.e. the property is not “underwater” on equity) must be applied against the debt.
Property cannot be sold free of a lien until the lien is paid off, which means that the lien both makes it more difficult to sell the property (since the owner’s interest is not free and clear) and also makes it more difficult to profit from the property’s sale. However, unlike the security interest in a mortgage, a judgment lien gives no right to foreclose or force the sale of the property. A lien holder simply cannot foreclose.
If the borrower passes away while the debt is outstanding, the creditor can proceed against the borrower’s estate for payment. It can also put a lien on property of the estate. So the creditor can sometimes prevent an heir from taking property “free and clear,” but the creditor still cannot actually foreclose on the property.
The last decade saw an explosion in consolidating debt; many times, homes were used to secure these debts, and there are a great number of homes with second mortgages, even though the goods purchased with the money had nothing to do with the home. In these situations, the consolidated loan holder may be able to proceed to force a sale—again, however, state laws vary about a secondary (or junior) mortgage holder's rights in forced foreclosure.
Forced foreclosure rules also may change based on whether this is a primary residence or a second home (e.g., an investment property).
Finally, note that the rules of foreclosure also change if the homeowner opts to seek protection in bankruptcy. In this case, unsecured debts will generally be discharged from collection, for many of the same reasons unsecured creditors cannot generally force a home sale. Some otherwise non-dischargeable debts (in some states, even property taxes—which are always paid first in any sale) may be discharged in whole or part.