Is Bankruptcy or Foreclosure Worse for My Credit Score?

credit score

Is Bankruptcy or Foreclosure Worse for My Credit Score?

Your credit score will probably take a hit with either foreclosure or bankruptcy, but bankruptcy can hit it harder. That said, don’t base your decision to file for bankruptcy or not solely on its potential impact on your credit score!

While it’s true that bankruptcy can have a more negative impact on your credit score, there are important considerations you must take into account. For many, choosing bankruptcy can provide the kind of debt relief they need to build healthier financial lives and overcome bad credit.

Bankruptcy Can Give You a Clean Slate

If your creditor is threatening you with foreclosure, you’re probably dealing with significant financial hardship. In addition to not being able to pay your mortgage, you may be having difficulty keeping up with credit card bills, medical debt, personal loan debt, and other forms of consumer debt.

If you file for Chapter 7 bankruptcy, a discharge can give you a clean slate. That means you can be free from all of your consumer debt – not to mention the fines, fees, and interest that accrued with each missed or incomplete payment. You may have to surrender your home to your creditor, but doing so can relieve you of the balance on your mortgage.

If you wish to keep your home, Chapter 13 may be a good option for you. This type of bankruptcy allows you to reorganize your debt into manageable payments that you make during the next three to five years to “catch up” to your debt. As long as you avoid defaulting on your Chapter 13 plan, your mortgage lender can’t proceed with foreclosure.

You Can Rebuild a Bad Credit Score Over Time

When considering the potential impact on your credit score, it’s important to remember that any hit is temporary; rebuilding a low credit score is possible.

While it may be difficult and can take some time, there are still many lenders out there who are willing to lend to those with low credit scores – even those with bankruptcy on their credit report.

Creditors Look at Foreclosure & Bankruptcy Differently

Every creditor is different, which means each can have its own opinion on what a foreclosure or bankruptcy means to them when it comes to risk. The reality is that you’ll probably have a hard time finding another mortgage while either remains on your credit report, but some lenders might prefer seeing a bankruptcy over others.

This is because bankruptcy typically means you took the initiative to deal with your debt and get a clean slate. You recognized you were experiencing financial hardship and took action to deal with it before it got worse. A foreclosure combined with a low credit score can tell a creditor that you’re still in a lot of debt and may not be able to make payments on any credit issued.

Bankruptcy Can Stop Foreclosure

Unlike bankruptcy, your lender initiates the foreclosure against you. This means you are on the defense, and nothing except paying off your mortgage arrears or filing for bankruptcy typically stops foreclosure.

An important consideration is that bankruptcy can (temporarily) stop an ongoing foreclosure or prevent one from proceeding. This is because at the beginning of a bankruptcy case (whether filing for Chapter 7 or Chapter 13), the judge issues an automatic stay, which is a court order barring creditor collection.

Foreclosure is just one means of collection your creditors are prevented from pursuing while your bankruptcy case is open. They also can’t garnish your wages, repossess your property, or harass you about your debt.

Consult with an Attorney for Guidance

The impact on your credit score is just one dimension to consider when you’re looking at bankruptcy or foreclosure. Ultimately, the best thing to do is secure legal counsel to provide you with the personalized guidance and services you need to deal with your debt.

When you need personalized support from a bankruptcy attorney, Buchalter & Pelphrey Attorneys At Law can help. We offer our clients dedicated assistance that entails custom-tailored legal strategies and solutions that may help them achieve debt relief.

Learn more during a free case evaluation – contact us online to get yours.

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