Does Bankruptcy Hurt Credit Worse Than Foreclosure?
For any individual considering filing personal bankruptcy, a key concern is of course what is the long term impact on your financial life of filing. One of the major issues some people are worried about is home foreclosure, and specifically which will be worse for them and their credit report, 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, 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 home loan, the lender is still protected because the loan is secured by your asset, and the lender can sell 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.
A 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 likely that by the time you are ready to file bankruptcy, you are already in poor financial shape and so is your credit score. A bankruptcy therefore may not lower 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 can 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 debts are discharged, while in a Chapter 13 filing 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 report score, a bankruptcy may not lower your credit score number too much more, however a bankruptcy stays on your credit report for ten years. So 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.
A home 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. By talking with a professional can you choose the right choice for you.
