Which Is Worse on Your Credit: Bankruptcy or Foreclosure?

When you are having money problems, options like foreclosure or bankruptcy start to become realities. While no one wants to go through either one, sometimes you have to choose one over the other. If you are looking at the decision from a credit standpoint, bankruptcy will do more harm almost immediately.

Function

• Foreclosure is a process that a mortgage lender goes through in order to repay an outstanding mortgage debt. If you owe money to a mortgage lender and you do not make your payments, the lender will foreclose on the property and sell it in order to get their money. Bankruptcy is a process that you can go through that will eliminate your debts or help reorganize them into a repayment plan. With bankruptcy, you may be able to keep your house and get rid of other debts.

Credit Impact

• Both of these processes can significantly harm your credit score. When it comes to going through foreclosure, this action could lower your credit score by as much as 160 points. When dealing with a bankruptcy, you could lower your score by as many as 240 points.

Time Frame

• The credit impact will not only be immediate for both options, it can also linger for many years. In fact, with a foreclosure, it will stay on your credit report for seven years. When you file for bankruptcy, this will remain on your credit report for 10 years or more. Any lender can pull up your credit report and look in the judgments section to see either one. While your credit score could improve sooner, both of these will still be visible for a long time.

Benefits

• The benefit of either of these processes is that you can get a fresh start. In the case of foreclosure, you will have to leave your house, but you can rid yourself of your largest monthly payment. In the case of bankruptcy, you can eliminate all of the debt that you have with the possible exceptions of student loans, child support, alimony and taxes. This can be a huge relief for those who are in trouble financially.

Alternatives

• When you get in financial trouble, foreclosure and bankruptcy are not your only options. If you are behind on your mortgage payment, you could qualify for a loan modification or a short sale. You might even use a deed in lieu of foreclosure in which you simply give the deed to the property back to the lender without going through foreclosure. In the case of bankruptcy, you could try a debt settlement in which you pay your creditors less than you owe to settle your accounts. There are many credit counseling companies that could help you explore your alternatives other than filing bankruptcy.