For any individual considering whether to file 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.
To start with, a foreclosure is based on your mortgage, which is basically just like any other secured loan, similar to a car loan. Should you fail to pay, the lender is still protected because the loan is secured by your property, and the lender can take back the home to pay for the debt. This repossession is called a foreclosure. Just like repossession of any other asset, like a car, a foreclosure is a serious mark on your credit report and lower 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, 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 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 choosing foreclosure or bankruptcy, 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.