Is Foreclosure Or Bankruptcy Worse For Your Credit?
For any individual considering filing personal bankruptcy, a key concern is of course what is the long term impact on your financial life of bankruptcy. One of the major issues some people are worried about is home foreclosure, and specifically which will be worse for them and their credit score, bankruptcy or foreclosure. But bankruptcy and foreclosure will impact your credit score differently, and are two different processes, so it’s not easy to compare apples to apples. Here is how you might approach making a decision.
A foreclosure is based on the mortgage loan you used to pay for the house, so it is mainly just like another type of secured loan, just like a car loan for example. If you are unable to pay your loan payments, the lender who is secured by your asset, the has the right to repossess, or foreclose, on your home and use the funds from a sale to pay the debt you owe. As with failure to pay a car loan, a foreclosure is bad for your overall credit score, and will bring down your score significantly.
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, foreclosure or bankruptcy, 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.
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 bankruptcy or foreclosure, 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.
