Difference Between Bankruptcy and Foreclosure

A lot of people who are having a difficult time paying their bills hear the two word "bankruptcy" and "foreclosure". They know that both words have something to do with debts and they want to know what is difference between bankruptcy and foreclosure? Following is a brief outline of the difference as well as an explanation of how the two interact.

Bankruptcy:

- Court action filed by a borrower who is also called a debtor.

- Filed in federal district court in district in which the borrower lives.

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- Purpose is to either have debts declared discharged or have protection from creditors.

- Based on federal law and, with a few exceptions, is the same in every state.

- Two types of personal bankruptcy and people must qualify before filing.

Foreclosure:

- Legal action pursued by a mortgage lender.

- Depending on the state in which the real property (house) is located, foreclosure may be a court action or a self help action.

- Purpose is to obtain either (1) the money owed to the mortgage lender, or (2) the real property (house) which was given as collateral for the loan.

- Based on state law and is different in every state.

How the bankruptcy and foreclosure interact:

In most cases, a mortgage lender will pursue a foreclosure action. It can either be a court action or a self help action where the lender gives the borrower notice and then follows the state's laws to obtain possession of the borrower's house. After the foreclosure has started, a borrower will file bankruptcy which has an "automatic stay" provision. This means that the foreclosure must immediately stop at least for a temporary time.

There are two types of personal bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, the court may declare that certain unsecured debts (such as credit cards, medical bills, etc.) are discharged meaning that a borrower does not have to pay them. With less debts to pay, it may be easier for a borrower to pay his/her monthly mortgage payments.

A Chapter 13 bankruptcy is a court ordered payment plan during which a borrower can pay any mortgage average over a period of time. By not having to pay a lump sum "catch up" amount, it is easier for a borrower to catch up on his/her mortgage payments and therefore easier to keep his/her mortgage intact (and keep his/her home).

This is general information only and not legal advice. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.

This article may be republished, but the wording must not be changed and the author links must remain active.

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