Bankruptcy and foreclosure are two different terms that are often confused when used on a regular basis. Let me help you clarify these differences through this post.
Foreclosure is associated with the nonpayment of a mortgage loan. It happens when a lender (usually a bank) possesses a borrower’s home. Since the home is foreclosed, the borrower no longer has rights to the property, thus forcing him to move out of it.
Bankruptcy is the state of being relieved with the debt associated to the mortgage loan. This commonly leads to restructuring payment arrangement between the lender and the borrower.
Both of the terms can be seen as a result (foreclosure) and as a state (bankruptcy) of financial difficulty.
To better understand the difference between foreclosure and bankruptcy, and also hopefully how to avoid them, consider earning an accounting masters.
The function of foreclosure is to assist a lender in recouping the past due balance a borrower is unable to pay. When is home is possessed by a lender, a borrower is prompted to take action to pay the past due amount on the mortgage loan. He does so in order to keep his home. On the lender’s side, the home serves as collateral in order to keep the loan payments coming.
The function of bankruptcy is two folds: to either provide relief or a discharge of an individual or a company’s debt or to allow an individual or a company to work out a restructured payment plan for a loan. The first function frees an individual of any outstanding debts while the second functions provides a more feasible term for a debt to be paid.
Foreclosure has two types: non-judicial and judicial. Judicial foreclosure involves a lawsuit being filed against the borrower before the civil court. It is further sub-divided into two types: strict foreclosure and sheriff sale. A sheriff sale happens when the property is placed in an auction with the lender placing the initial bid. The property is given to the individual with the highest bid. Strict foreclosure is where the court provides a specific date where the borrower needs to pay the past due amount on the loan. If the borrower fails to pay, the property is released to the lending institution without an auction happening.
Non-judicial foreclosures involve putting a property for sale by the lender without filing a civil lawsuit. While the civil court is out of the picture, the laws governing the sale is regulated by the state. Hence, the term statutory foreclosure is a synonym for this type. If you are wondering why this is possible, it is because the borrower agrees to this term before the loan is given out.
Bankruptcy has two types: Chapter 7 and Chapter 13. Chapter 7 Bankruptcy involves total non-repayment of the loan and allows borrowers to start anew. This does not include student loans, child support, or debts resulting from DUI cases. Chapter 13 Bankruptcy, on the other hand, often leads to sheriff sales. However, this type offers a borrower the chance to repay a debt by entering a payment arrangement with the lender.
Foreclosures can lead to the borrower losing his home or property depending on his ability to repay the past due balance within a specified time and the agreement was signed when the loan was approved.
Bankruptcy can lead to a process called automatic stay. This is determined by the bankruptcy court. When under automatic stay, a property cannot be foreclosed nor can any existing court proceedings take place unless specified by otherwise by the bankruptcy court. Another effect deals with a restructured payment plan agreed upon by the borrower and the lender to ensure continuous payment against the loan.