Does Bankruptcy Hurt Credit Worse Than Foreclosure?
On September 01, 2009 in Finance
For any individual considering filing for 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 foreclosure on a home, and specifically which will be worse for them and their credit, bankruptcy or foreclosure. But foreclosure and bankruptcy 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, home 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 simply 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.
Filing bankruptcy is altogether different from foreclosure, since in bankruptcy, you can choose to eliminate multiple debts or in the alternative set up a debt repayment schedule. The credit reporting companies will never tell which is worse, bankruptcy or foreclosure, but it’s likely that by the time you are ready to file bankruptcy, you are already in bad 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 go bankrupt, remember that you can still lose your house to a foreclosure 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 home foreclosure.
As for your credit report, 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 a bankruptcy 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 regain 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 hold onto their home no matter what, while others might consider it important to protect their credit score. By talking with a professional can you choose the right choice for you.