Bankruptcy
Definition and meaning of Bankruptcy in real estate.
Bankruptcy is a federal legal proceeding designed to help individuals or businesses eliminate or restructure their debts under the protection of a bankruptcy court.
In more detail
Filing for bankruptcy immediately triggers an automatic stay, which stops creditors from pursuing collections, lawsuits, or foreclosure sales on the debtor's properties. In residential real estate, the type of bankruptcy filed, such as Chapter 7 liquidation or Chapter 13 reorganization, dictates how the debtor's home is treated.
Under Chapter 7, non-exempt properties may be sold by a court-appointed trustee to pay creditors. In Chapter 13, the debtor can often keep their home by agreeing to a court-approved repayment plan for their past-due mortgage balances.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Common forms for individuals | Chapter 7 and Chapter 13 |
| Key protection | The automatic stay stops foreclosure immediately |
| Managed by | A court-appointed bankruptcy trustee |
A homeowner facing foreclosure files for Chapter 13 bankruptcy, which halts the foreclosure sale and allows them to repay their mortgage arrears over a multi-year repayment plan.
Frequently asked questions
What is the main difference between Chapter 7 and Chapter 13 bankruptcy for homeowners?
Chapter 7 bankruptcy usually involves liquidating non-exempt assets to pay debts quickly, while Chapter 13 allows debtors to keep their property by restructuring their debt into a three-to-five-year repayment plan.
How does filing for bankruptcy affect a pending foreclosure?
Filing for bankruptcy pauses a foreclosure sale immediately due to the automatic stay, giving the homeowner time to work out a repayment plan or execute a short sale.
Related terms
Sources & references
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