There is a difference between foreclosure and bankruptcy. The biggest difference between foreclosure and bankruptcy is that you lose your home in a foreclosure, and you can keep your home in a bankruptcy. A foreclosure occurs when you default on your mortgage, and the lender takes back your home and sells it. Bankruptcy gives you protection against your creditors and discharges your debts or restructures your debt, depending on whether you file a Chapter 7 bankruptcy or Chapter 13 bankruptcy. While bankruptcy puts a stay or hold on foreclosure until the bankruptcy is discharged, there are other foreclosure prevent options that may work better for you such as:
- Mortgage modification
- Refinancing
- Short Sale
- Selling Your Home
- Deed in Lieu
- Forbearance
- Reinstatement
Bankruptcy should always be used as a last report to prevent a foreclosure.
Foreclosure vs. Bankruptcy
In a foreclosure, you lose your home and may be subject to a deficiency judgment for the difference between the sale proceeds and the amount you owe your lender. Also you may have to pay income tax on your canceled debt if you don’t satisfy the requirements for mortgage debt forgiveness. In a Chapter 7, a foreclosure deficiency judgment is wiped out, and your mortgage debt and all other debts are discharged. In a Chapter 13 bankruptcy, you can keep your home and reorganize your debts, including your mortgage debt, by entering into a court approved payment plan for 3-5 years. However, if you miss a mortgage payment, your lender could foreclose. In that case, you would have a foreclosure and a bankruptcy on your credit, which would have a much more negative impact.
Your Credit
A foreclosure stays on your credit 7 years. However, your other creditors can still file negative reports if you are late on your credit cards or car loan. A bankruptcy stays on your report 10 years, but the most negative impact occurs right after the bankruptcy is discharged. You can rebuild your credit after a couple years. Mortgage lenders say that it’s easier to get a new mortgage with a bankruptcy than it is with a foreclosure.
Consult with an Attorney
Since everyone’s situation is different, it is best to consult with either a foreclosure defense attorney or a bankruptcy attorney to help you make the right decision. Both are knowledgeable and can explain the advantages and disadvantages of foreclosure and bankruptcy to you. Some attorneys practice in both areas of law.
