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How To Choose Between Bankruptcy Or Foreclosure
August 30th, 2009 by Janet SmileyHave you been thinking about filing personal 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 foreclosure and bankruptcy 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 property, 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 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 probably that by the time you are ready to file bankruptcy, you are already in bad financial shape and so is your credit. A bankruptcy therefore may not lower your credit score too much more.
But here are the issues you want to consider. If you have not been foreclosed yet, and you file bankruptcy, you can still lose your home because the lender can ask the bankruptcy court to permit a sale of your house to pay off your debt. This type of sale would happen in a Chapter 7 bankruptcy, where your debt is discharged, but in a Chapter 13 bankruptcy you might get a chance to continue to make payments under a plan. In a Chapter 13, this type of bankruptcy might help you avoid foreclosure.
When it comes to your credit score, while a bankruptcy might not lower your credit score number drastically if it was already low, the fact of the bankruptcy will remain on your credit report for ten years. So, while in five years, for example, you could have a better credit score, a lender will still see that you filed bankruptcy five years ago, and turn down your applications for credit. Foreclosure is like any other repossession, and stays on your report for seven years, but after a few years you can qualify again for credit. You can see that credit score alone is not the only thing you need to consider when making a choice 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.
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