Have you been thinking about whether to file bankruptcy? If so, it’s probable that you’ve also been weighing the impact 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.
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 home, 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.
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.
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 Chapter 13 information at Bankruptcy Help Online.
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