You’re behind on your mortgage—do you declare bankruptcy, or do you default and allow the bank to foreclose? Which option does less damage to your credit score? The answer may surprise you.
FICO SCORE
What you call your credit score or credit rating is you FICO score, which was originally developed by a company called Fair Isaac. The FICO score is a way of coming to a numerical rating or judgment about how good a credit risk a person or business is. In theory, the higher the score, the more likely it is that person or entity will repay any loans or debt. A person or company with a higher score can borrow more easily, borrow more money, and get better terms than someone with a lower score, who would be a bigger risk. FICO scores range from 300 to 850, but you’re never going to see an 850—Bill Gates and Warren Buffet probably don’t have 850s.
FICO Impact of Bankruptcy Vs. FICO Impact of Foreclosure
Exactly how FICO is calculated is up there with the Coca Cola recipe in terms of closely guarded corporate secrets. The fear is that if people knew how the score was calculated, they could manipulate their credit scores. That said, in general terms, the factors that are considered are known, such as total amount of credit; amount of credit that is being used; whether there have been late payments; whether there have been defaults; the types of credit or loans; and how long you’ve had credit.
No one other than those who calculate the scores knows exactly what the impacts of a foreclosure or a bankruptcy are. However, it is believed, based on looking at people’s “before” and “after” scores, that either one will reduce your FICO score by between 100 and 200 points. That’s right: the best guess is bankruptcy and foreclosure have the same effect.
Factors to Consider:
- Bankruptcy may not affect your credit score more, but it probably affects it for longer—a bankruptcy will stay on your credit report for up to 10 years.
- Bankruptcy will address all your debts at once; if you are foreclosed on, you still owe all your other lenders, and could have other defaults—which will keep pushing your score down.
- Foreclosure does not necessarily wipe out debt—you could lose your house and still owe the remaining balance of the loan.
- You can only declare bankruptcy once every several years—so if you use it know, you may not have available as an option later.
How an Attorney Can Help
In addition to the factors above, there are many other elements to consider in deciding what to do if you are in trouble on a mortgage or home equity loan. An attorney can help you weigh all the different factors, decide what is best for your situation, then carry out the plan.
