Bankruptcy vs. Foreclosure for Credit

A personal bankruptcy filing and a foreclosure on a property are two events that have a major impact on your credit rating. You may be debating if you should file for bankruptcy to try and save your home from foreclosure, and wondering if it would be worse on your credit to show the bankruptcy, or just to proceed with the foreclosure. This is not a decision to be made lightly, and you should consider all of the facts before proceeding.

Credit Score

The formula for calculating your credit score is not known. However, we do know what type of information affects the FICO score, and credit scoring experts have some idea as to the effects that certain events will have on your score. A bankruptcy generally has a greater negative impact on your credit score than a foreclosure, because a bankruptcy usually affects many accounts, whereas a foreclosure only affects one. Both events will probably impact your credit score with a 200 to 300 point drop, but this will vary depending on other information in your credit reports.

New Loans

Time heals all credit wounds, and your credit score will begin to improve once any negative event has past. You will probably be able to obtain new credit cards or maybe a car loan shortly after you experience either event, but these accounts will likely have high interest rates and other extra fees. It will likely be at least two years, and probably closer to four, before you will be able to receive a conventional mortgage after bankruptcy or foreclosure.

Duration

A Chapter 13 bankruptcy filing will show on your credit report for seven years, and a Chapter 7 will be there for 10 years. A foreclosure will be listed for seven years. After four to five years, the effects of any of these events on your credit will be minimal, provided you pay your bills on time and do not experience any more problems. You can still owe money on a foreclosure after the sale of the home. This balance can continue reporting into the future as a collection account while you pay it off, whereas a bankruptcy generally ends at the discharge date, and becomes part of your credit past.

Making the Decision

You should make your decisions based on sound financial principles, and not just what works best for your credit score. If you find yourself in financial trouble with a home that you owe more on than it will bring at sale, you may want to work with the bank on a short sale without recourse. This is where the bank agrees to accept what the home brings at a sale as settlement in full for the loan. This will probably have the same effect as a foreclosure on your credit, but there will not be an ongoing deficiency balance reported against you. If bankruptcy is inevitable, you may want to file and move on, and not concern yourself with the bankruptcy's effects on your credit.