Definition:
Bankruptcy is a legal process in which individuals or businesses unable to repay debts seek relief through court, either eliminating or restructuring their obligations.

Example:
After losing his job, Mark can't afford his mortgage and other debts, so he files for bankruptcy. The court reviews his assets and liabilities, discharging some debts while restructuring payments, enabling Mark to recover financially but negatively impacting his credit score.

Explanation:
In real estate, bankruptcy significantly affects property ownership and transactions. Common bankruptcy types include Chapter 7 (liquidation) and Chapter 13 (reorganization). Under Chapter 7, debtors might have to sell properties to pay off creditors. Under Chapter 13, property owners usually keep their home but follow a court-approved repayment plan.

When someone files bankruptcy, an automatic stay stops foreclosure processes temporarily, allowing homeowners breathing room. However, bankruptcy negatively impacts credit ratings, making obtaining future mortgages difficult or resulting in higher interest rates. Bankruptcy filings remain on credit reports for several years (7–10 years), directly affecting borrowing capability and eligibility for new mortgages.

Importance:
Understanding bankruptcy matters immensely for buyers and sellers. Buyers facing bankruptcy must carefully manage their financial situation, as future home financing could become complicated. Sellers dealing with bankruptcy may need court approval to sell property, affecting timelines and negotiations significantly.

Knowing the implications of bankruptcy empowers homeowners and buyers to make informed, strategic financial decisions, protecting assets and managing future homeownership goals.

In short, bankruptcy provides financial relief but carries serious long-term consequences, making awareness critical for informed real estate decisions.