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How To Choose Between Bankruptcy Or Foreclosure
August 31, 2009 | Leave a Comment
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, foreclosure or bankruptcy. 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 property, 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.
When considering bankruptcy however, this is a different situation. Bankruptcy allows you to eliminate or repay multiple debts or set up a repayment plan. Credit reporting agencies won’t tell which is worse for your credit, a bankruptcy or foreclosure, but if you’re in a bad enough position to file bankruptcy, it’s likely your credit is already pretty bad. Thus a bankruptcy likely won’t result in much lower of a credit score.
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 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.
Are you trying to determine which is worse, bankruptcy or foreclosure? Find bankruptcy advice at Bankruptcy Help Online.
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