How To Choose Between Bankruptcy Or Foreclosure

By Janet Smiley

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 worries people 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 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 asset, 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 somewhat different, because it is an organized way to wipe the slate clean of nearly all of your debt, both secured and unsecured. Generally, you can either get rid of, or discharge, debt, or set up a court-approved repayment plan. When it comes to which is worse a bankruptcy or foreclosure for your credit score, the big credit scoring companies will never tell you exactly. However by the time you have gotten over your head in a big way enough to go to bankruptcy court, your credit is probably already pretty poor, so that a bankruptcy will not hurt your credit score too much more.

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.

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 choose foreclosure or bankruptcy, you should find a competent bankruptcy attorney and a non-profit credit counseling agency to meet with. These agencies can help determine exactly how your income, expenses and debt will be impacted by either foreclosure or bankruptcy. Some people might want to keep their home at all costs, while others might consider it important to protect their credit score. Only by talking to a professional can you find the right choice for you. - 16931

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