Is Bankruptcy Worse Than Foreclosure?
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 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.
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 foreclosure or bankruptcy, 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.
Yet here are the big issues to consider before making a decision. If you still haven’t been foreclosed on by your lender, and you decide to file bankruptcy, remember that you can still lose your house to a sale because the mortgage lender is able to ask the bankruptcy court to allow a sale in order to pay your debt. A sale would more likely occur in a Chapter 7 bankruptcy, where most of your debt is discharged, while in a Chapter 13 bankruptcy you set up a payment plan that might allow you the chance to keep your home by making payments. Using a Chapter 13 bankruptcy 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 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.