Bankruptcy, in real estate, serves as a legal remedy that is an alternative to foreclosure. It enables a business or individual to have a fresh financial start. It allows the discharge of debts or the forming of a plan for partial repayments.
Bankruptcy VS Foreclosure
In contrast to bankruptcy, a foreclosure forfeits a home to the mortgage lender through defaulting. With the claiming of the collateral real estate, the bank can satisfy the past due balance on the loan.
Generally, foreclosure should only be considered after other options, including bankruptcy, have been exhausted or examined.
Laws on Real Estate Bankruptcy
When it comes to Chapter 13 bankruptcies, it is standard for people to keep their homes under their mortgage. On the other hand, in Chapter 7 bankruptcies, there is often a need to sell off the property to repay debts.
For the latter, a person or entity can keep real estate only if it falls under a state exemption. The most important kind is the homestead exemption, wherein the borrower is allowed to keep the place they live in as long as the home equity is less than the exemption amount.
In the case that the equity is higher, the property will need to be sold and the borrower will be given cash equivalent to the exemption amount.
Homestead Exemptions by Territory or State
Most states in the US have homestead exemption laws found in their constitution or statutes. In some jurisdictions, homestead protection is automatic. In others, people only receive protection if they file a claim. In addition, protection is lost if the homeowner decides to take up primary residence elsewhere.