Is Bankruptcy Worse Than Foreclosure?

Have you been thinking about whether to file 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 people are worried about is the possibility of foreclosure, and most important, which will be worse for them, bankruptcy or foreclosure. It’s important to remember however that bankruptcy and foreclosure 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 property, 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 altogether different from foreclosure, since in bankruptcy, you have the option to eliminate multiple debts or in the alternative set up a debt repayment schedule. The credit scoring companies will never tell which is worse, bankruptcy or foreclosure, but it’s probably that by the time you are ready to file bankruptcy, you are already in bad financial shape and so is your credit. A bankruptcy therefore may not lower your credit score too much more.

But there are some important issues to consider. If your lender has so far not foreclosed yet, and you decide to file bankruptcy, you could possibly still lose your home. The lender is permitted to ask for relief, which means the bankruptcy court can allow a sale of your house to pay your mortgage debt. This type of sale is most likely in a Chapter 7 bankruptcy, in which your debt is discharged, while if you file Chapter 13 bankruptcy you can set up a payment plan and possibly keep your home. Use of a Chapter 13 could thus help you avoid foreclosure.

When it comes to your credit score, while a bankruptcy might not lower your credit score number drastically if it was already low, the fact of the bankruptcy will remain on your credit report for ten years. So, while in five years, for example, you could have a better credit score, a lender will still see that you filed bankruptcy five years ago, and turn down your applications for credit. Foreclosure is like any other repossession, and stays on your report for seven years, but after a few years you can qualify again for credit. You can see that credit score alone is not the only thing you need to consider when making a choice between bankruptcy and foreclosure.

Before choosing bankruptcy or foreclosure, it’s best to talk to a bankruptcy attorney and also a non-profit credit counseling agency. These individuals can help you determine how your debt, income and expenses will play out in either instance. For some people, it’s more important to protect their credit score; for others, it’s necessary to use bankruptcy to start over cleanly. If you’d rather save your home, you ay not care about your credit score. Talk to a professional to find out more before taking any steps.

Are you trying to determine which is worse, bankruptcy or foreclosure? Find bankruptcy advice at Bankruptcy Help Online.