Choosing between the lesser of two credit evils.
Sometimes when life happens you’re put in a situation where you have to choose between bad and worse. And that’s exactly the situation you can get into when you have severe financial distress and have to choose between filing for bankruptcy or going into foreclosure.
If you can go into foreclosure with your lender to avoid bankruptcy, should you do it? Or should you file for bankruptcy to stop a foreclosure?
The information below can help you weigh your options. If you need personalized advice, we’re here to help you find it. Call us or complete the form to the right to connect with the critical solutions and professional assistance you need.
Foreclosure may mean less damage and less time
First and foremost, keep in mind that your credit score is unique to you. The score you have is based on the sum total of your credit history, and since no two consumers have the same history, it means that the same penalty from a negative item in a credit profile will affect those two consumers in different ways.
That being said, FICO – the authority on credit scores – released a report that showed the impact of various negative items on an average consumer credit profile. They used two sample profiles to show the impact of various negative items. One consumer profile had a credit score of 680, while the other had a 780.
|680 FICO Credit Score||780 FICO Credit Score|
Again, keep in mind that even if you had those exact credit scores, the actual score decrease you would see would likely be different because the sum total of the info that led to that score would likely be different. Note that the bankruptcy credit impact is the same, whether you file for Chapter 7 or Chapter 13.
In addition to the actual score decrease, the time period of a foreclosure credit penalty may be less than a bankruptcy, depending on which Chapter you’re petitioning to receive.
- A foreclosure is removed from your credit report after 7 years.
- Chapter 13 bankruptcy is also removed after 7 years.
- But a Chapter 7 bankruptcy is removed after 10 years, so you face an extra three years of credit score damage.
So at a first look, it seems like foreclosure is the better option, since it won’t decrease your score as much, and will be removed faster than a Chapter 7 filing. But that may not be the case, depending on your goals following the action.
Future homebuyers beware
Just because the score damage is less, it doesn’t mean foreclosure is the better option in every situation. Let’s say that after this period of financial distress is rectified you need to purchase a new home. How do you think a new mortgage lender is going to look at you when they see a recent foreclosure on your credit profile?
Remember, a credit score isn’t the end-all be-all of whether you get approved or not. Lenders review your credit profile and make decisions about you based on the information that your report contains. So even though a lower credit score usually means you’re a higher risk as a borrower, a mortgage lender may see things differently.
It’s possible to file for bankruptcy and take steps to rebuild your credit score so you can get mortgage approval within just a few years. On the other hand, seeing the foreclosure will immediately raise a red flag with mortgage lenders.