Foreclosure or Personal Bankruptcy?

Bankruptcy or foreclosure  That’s the sad question that many homeowners in the Prescott Arizona area are facing these days.  Unfortunately, the answer is not a simple one.

Are your trying to save your home or your credit score?  If your are trying to save your home and if  you have managed to stay current on your mortgage payments but haven’t been able to keep up with other debts, bankruptcy may make more sense, as you’ll likely be allowed to keep your home. 

What’s Less of a Blow to My Credit Rating?

 I’ve read a few different things that say it’s better for your credit to go the bankruptcy route, and but according to the Fair Isaac Corporation, FICO, as we know it, that’s not case.

When you have a foreclosure:

 A foreclosure remains on your credit report for 7 years, but its impact to your FICO® score will lessen over time.  While a foreclosure is considered a very negative event by your FICO score, it’s a common misconception that it will ruin your score for a very long time.  In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years.  The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.

When you declare a bankruptcy:

A bankruptcy is considered a very negative event by your FICO® score regardless of the type. As long as the bankruptcy is listed on your credit report, it will be factored into your score. However, as time passes, the negative impact of the bankruptcy will lessen. Typically, here is how long you can expect bankruptcies to remain on your credit report (from the date filed):

• Chapter 11 and 7 bankruptcies up to 10 years.
• Completed Chapter 13 bankruptcies up to 7 years.

Keep in mind that these dates refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit report after 7 years.

For more information of from FICO on how bankruptcy and foreclosure will affect your FICO score, see the Credit Education Center section at their website.

What Should You Do If You Are Facing Foreclosure

Consult An Attorney:  If you are facing a financial crisis that may end in either foreclosure or bankruptcy, consult an attorney to explore what your best option may be.  The right decision may save you years of restricted credit in the future 

Talk to Your Bank: Your lender might grant you a few months’ time to sell your house on your own, for instance, or banks might agree to a payment plan for your credit cards.  If your home is worth more than what you owe on your mortgage, you might give the lender your deed in lieu of foreclosure.  This means you will turn over the deed to the lender, who assumes ownership of the home. 

Know the Facts:  Bankruptcy and foreclosure move forward in entirely different ways.  Check out our Resource Center and review the Tips to Prevent Foreclosure, Short Sale FAQ, Foreclosure Myths, Seller FAQ, and the IRS and Implications of Foreclosure.

Additional resources:

FreddieMac Guide to Avoiding Foreclosure

U.S. Department of Justice Bankruptcy Information Sheet

U.S. Courts’ Bankruptcy Basics