Recovery From Foreclosure & Bankruptcy

Serious credit situations, such as a bankruptcy and foreclosure, can cause significant credit damage and negatively impact financing options. Several factors can increase the chance of bankruptcy and foreclosure. But fortunately, recovery is possible wherein you can fix your low score and obtain future credit.

What is Bankruptcy?

Being bankrupt refers to being unable to meet financial obligations. Someone with a lot of credit card debt and other loans may consider filing bankruptcy after a drop in income. Once a debtor defaults on his bills, creditors may pursue collection attempts through constant phone calls or threatening lawsuits and garnishments. Bankruptcy protects a debtor from creditors and can eliminate debts or decrease the amount he must pay his creditors.

What is Foreclosure?

Obtaining a mortgage means making monthly home loan payments to pay off the debt. Mortgage terms vary; but on average, debtors have 30 years to pay off the loan. Throughout the course of the mortgage term, situations can change where a borrower loses his income and stops making his payment. Lenders are usually tolerant in the beginning, but they will foreclosure (take back the property) if borrowers can't maintain house payments.

Consequences

The repercussions of a bankruptcy and foreclosure are significant, and both can gravely lower credit scores and stop credit approvals. A bankruptcy remains on credit reports for up to 10 years, whereas a foreclosure remains on reports for seven years. Actual credit damage from both varies. But according to the Consumer Credit Counseling Services, a bankruptcy can reduce scores by more than 100 points. AOL Real Estates states that a foreclosure can reduce scores by 200 to 300 points.

Recovery

Recovering and regaining points after a bankruptcy and foreclosure depend on how well you manage your credit history. Good credit habits help in both situations. Even with a significant drop in points, you can little by little add points to your FICO score. Timeliness with regards to other credit accounts is key to recovery. If you have credit cards or loans in your name after a bankruptcy or foreclosure, always pay these accounts to avoid additional damage on your report. Creditors will frequently update your credit report, and the less negative information reported, the better your score. Keeping debts low also helps boost your score after bankruptcy and foreclosure. Make the necessary credit improvements and you can qualify for a mortgage two years after bankruptcy and three years after foreclosure.