What Are the Differences Between Bankruptcy and Foreclosure?


Quick Answer

Filing for bankruptcy allows debtors to suspend loss of property while bankruptcy courts work out payment plans or discharge of debts, but foreclosure is the action of lenders to repossess property on which debtors owe payments, reports SFGate. Bankruptcy proceedings sometimes allow debtors to forestall foreclosure and keep their homes, while the purpose of foreclosure is to take property away from debtors. Although both proceedings damage credit scores, bankruptcy may allow debtors to rebuild scores more quickly, points out Nolo.

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Full Answer

When homeowners miss several mortgage payments, lenders initiate the foreclosure process, which involves auctioning off homes to recoup the value of home loans, explains Nolo. If borrowers file for either Chapter 7 or Chapter 13 bankruptcy, courts issue automatic stay orders that force lenders to cease action pending bankruptcy proceedings. Although lenders may file motions to lift the stay, bankruptcies forestall the sale of homes for at least two to four months.

Debtors file for Chapter 13 bankruptcy to attempt to save their homes by following a court-mandated payment plan, according to Nolo. Under Chapter 7 bankruptcy, debtors still lose their homes, but they can usually remain in them without payment during the bankruptcy proceedings, and they eliminate other debt and tax liabilities. Foreclosures cause long-term damage to credit scores and do not eliminate other debt, while bankruptcies leave people debt-free and able to start fresh.

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