Bankruptcy and foreclosure are two prevalent situations involving people or corporations encountering financial difficulties. Although they are sometimes used interchangeably, bankruptcy and foreclosure are two types of legal actions with distinct goals and outcomes.
Summary Chart
| BANKRUPTCY | FORECLOSURE |
| The business owner has to give up mortgaged real estate |
| It is a secured debt |
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Definition
When a person or corporation cannot discharge existing debts or obligations, a judicial action called bankruptcy is begun. The bankruptcy procedure starts with a petition filed by the most frequent debtor or creditors, which is less common. The debtor’s assets are measured and analyzed, and some of the assets may be utilized to repay the remaining debt.
Foreclosure is the legal process through which a lender seeks to collect the amount owing on a defaulted debt by seizing and selling the mortgaged property.
Bankruptcy vs. Foreclosure
The primary distinction between the two is that bankruptcy allows individuals or corporations to receive a discharge or payment plan for their debts. In contrast, a foreclosure allows a mortgage lender to claim possession of real estate to aid in settling the total owing on a past-due loan.
There are times when the two overlap. A foreclosure occurs when there are no options other than the mortgage lender seeking to seize possession and ownership of the real estate. Through a reaffirmation agreement, bankruptcy presents a potential alternative to the foreclosure process. The reaffirmation agreement allows the debtor to keep ownership of the property while requiring her to make regular payments to the mortgage lender.
As a result, the ultimate risk of foreclosure is the loss of real estate, including the debtor’s house. A ruling allowing the debtor to keep some real estate, including the house, is a possible bankruptcy outcome.