Have you been thinking about filing for bankruptcy? If so, it’s probable that you’ve also been weighing the effect of that bankruptcy filing on your financial life. One major issue that worries people is the possibility of foreclosure, and most important, which will be worse for them, bankruptcy or foreclosure. It’s important to remember however that foreclosure and bankruptcy are very different, and hard to compare. Here are the important issues you’ll want to think about.
To begin, a foreclosure stems from your mortgage loan, which is mostly like any typical type of secured loan, like a car loan. In the event that you are unable to pay, the lender will be protected because the debt is secured by your home, therefore the lender will repossess, or foreclose, on your home to pay your debt. In the same way as another asset such as a car, a foreclosure will be a major black mark on your credit and bring down your score.
Bankruptcy is somewhat different, because it is an organized way to wipe the slate clean of nearly all of your debt, both secured and unsecured. Generally, you can either get rid of, or discharge, debt, or set up a court-approved repayment plan. When it comes to which is worse a foreclosure or bankruptcy for your credit score, the big credit scoring companies will never tell you exactly. However by the time you have gotten over your head in a big way enough to go to bankruptcy court, your credit is probably already pretty poor, so that a bankruptcy will not hurt your credit score too much more.
But here are the issues you want to consider. If you have not been foreclosed yet, and you file bankruptcy, you can still lose your home because the lender can ask the bankruptcy court to permit a sale of your house to pay off your debt. This type of sale would happen in a Chapter 7 bankruptcy, where your debt is discharged, but in a Chapter 13 bankruptcy you might get a chance to continue to make payments under a plan. In a Chapter 13, this type of bankruptcy might help you avoid foreclosure.
As for your credit score, a bankruptcy may not lower your credit score number too much lower, however your bankruptcy filing stays on your credit report for ten years. So with a bankruptcy, in five years you might have a better credit score but lenders could still see your bankruptcy filing from five years ago, and turn you down on that basis. Foreclosure on the other hand is like any other repossession or single bad debt. It stays on your credit report for seven years, but once you restore some good credit after a few years you could once again qualify for credit. It’s important to recognize then that your credit score is not the only thing to consider between bankruptcy and foreclosure.
Before you make a choice between foreclosure or bankruptcy, find a good bankruptcy lawyer to discuss your situation, and contact a non-profit credit counseling agency. These groups can best help you decide how your income, debt and expenses will be impacted in either case. Some people may prefer to keep their credit score as high as possible, but others may want to keep their home, no matter the impact on their score. Discuss your situation with a professional, to see what your next step should be.
