Foreclosure vs. bankruptcy is a dilemma that many homeowners are facing. Declining home prices have left a number of homeowners in a bad financial situation. On top of that, millions of people are out of work or have had their wages reduced. Both foreclosure and bankruptcy are difficult choices for homeowners to make. In a foreclosure, you lose your house. Bankruptcy gives you protection against your creditors, and you can keep your home, provided you keep your mortgage payments current. If you have a lot of assets, you won’t be able to keep them in a bankruptcy. Since most people are not familiar with the foreclosure laws or the bankruptcy laws, it is a good idea to seek professional legal help and advice from an attorney.
Advantages and Disadvantages
The following are advantages and disadvantages of foreclosure and bankruptcy:
- Foreclosure is when you default on your mortgage, and you lose your home. You can still keep your credit cards.
- Some states allow your lender to obtain a deficiency judgment against you. Then the lender could try and force you to sell your assets to pay the difference between your sale proceeds and your mortgage balance. If you don’t have any substantial assets, then you don’t have to worry about the lender coming after you.
- Bankruptcy stops your creditors, including your lender, from collection against you. The lender could petition the court to proceed with the foreclosure. The stoppage is temporary until you work out a payment plan with your creditors.
- Chapter 7 bankruptcy discharges your debts, and lets you start clean. A foreclosure deficiency judgment is wiped out in Chapter 7 bankruptcy as well.
- Chapter 13 allows you to keep your home and reorganizes your debt. However, if you default, then the lender can foreclose. This makes things worse because then you will have both a foreclosure and a bankruptcy on your credit.
- Bankruptcy does not allow you to keep substantial assets such as art collections and other collectibles, expensive jewelry. You will probably have to sell your investment property to help pay off your creditors
Credit Damage
Both foreclosure and bankruptcy damage your credit. Foreclosure remains on your credit 7 years. Bankruptcy remains on your credit for 10 years. It is much easier to get a new mortgage within 2-4 years if you have a bankruptcy than if you have a foreclosure. The reason is that the lender knows that you don’t have debt after a bankruptcy. Also, you have to wait 7 years before filing for bankruptcy again. Figure either way you are going to have to pay a higher interest rate for awhile.
Consult with an Attorney for Advice
A foreclosure defense attorney and/or a bankruptcy attorney can advise you of the advantages and disadvantage of a foreclosure vs. bankruptcy. Both are complicated. The attorney can help you file the appropriate documents and represent you in court, as well as negotiate with your lender and your other creditors.
