The tokenization industry routinely ignores the messy, physical reality of defaults. This research brief addresses a critical systemic blind spot: the collision between automated, immutable smart contract execution and the rigid jurisdictions of traditional bankruptcy courts. By analyzing frameworks like the German Insolvency Code (InsO) and the Swiss Debt Collection and Bankruptcy Act (SchKG), we deconstruct the necessity for legal override mechanics (e.g., ERC-3643) and map the actual legal plumbing required when on-chain collateral fails.