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What is the difference between real estate foreclosures versus bankruptcy?



Individuals or businesses in financial distress often find themselves choosing between two alternatives. It's important that they understand the difference between real estate foreclosure versus bankruptcy. The two paths are often mentioned and referenced as similar alternatives to be considered in tandem. However, bankruptcy and foreclosure are markedly different types of legal remedies. Each remedy has diverse objectives and outcomes.

How functions differ

The purpose of filing for bankruptcy relief is to permit a person or business to have a fresh start financially. The bankruptcy affords the person or entity the opportunity to obtain a discharge of his or her debts or to establish a plan for partial repayment of debts. The function of a foreclosure, however, is to permit the mortgage lender to have the chance to claim ownership of the collateral real estate. The reclaiming of the lender’s collateral is used by the mortgage bank to help satisfy the past-due balance on its loan with the defaulting owner.

Differing effects

The filing of a bankruptcy petition directly impacts a foreclosure proceeding because of the automatic stay statutory tool. The automatic stay order goes into effect immediately in a bankruptcy filing, prohibiting any foreclosure, other proceedings or other actions against a debtor without further order of the Bankruptcy Court.

Potential outcomes

The ultimate potential of a foreclosure proceeding might very well mean that a homeowner or property owner loses his or her home or real estate. The probable potential of a bankruptcy filing is that the debtor has made a decision to address financial distress and organize it under a new approach with the help of the bankruptcy system and its legal protections. This system allows the debtor to retain his or her home, as well as other statutorily exempted, excepted and/or otherwise-protected personal property.

Foreclosure happens when there are no other viable alternatives aside from the mortgage bank taking possession and ownership of the collateral real estate. Bankruptcy represents an alternative to foreclosure and its unfavorable impacts by allowing the debtor and the lender to restructure the debt and its repayment. Through a reaffirmation agreement, the debtor can keep ownership of real estate and make regular payments on the reformulated mortgage to the bank.