Does a Foreclosure Hurt Your Credit More Than a Bankruptcy?

Foreclosure and bankruptcy are both daunting to consider.

However, if you struggle to keep up with your mortgage payments, this may be your final option after a prolonged financial struggle. While both will undoubtedly affect your credit score, minimizing the fallout and setting yourself up for the best chance of credit repair is critical. 

Depending on your financial situation, one might be better than the other. If you’re facing the decision of foreclosure or bankruptcy, here’s what you need to know.

Lender Negotiation
Bankruptcy and foreclosure each carry a different sense of urgency. Depending on your circumstance, one might be a better financial fit. Consider the status of your mortgage: Have you missed a single payment, or have you progressed past the 90-day mark? Before making a critical decision, you must talk with your lender first and see how they might be willing to help. Contact your bank and explain your circumstances. If your money troubles are only temporary, requesting a period of forbearance or other options to establish your financial stability may be possible. If your financial problems are more permanent, bankruptcy or foreclosure may be your last option.

The Impact of Foreclosure and Bankruptcy on your Credit Score
Both foreclosure and bankruptcy have long-term consequences and should be an absolute last resort. A foreclosure will reflect on your credit score for seven years, while bankruptcy will stay on your credit report for up to 10. Although it may seem like living with impacts such as these on your credit score for a decade is devastating, it is essential if you expect to rely on your credit score sometime in the future. If you are at a crossroads in your decision-making, you’ll want to consider the impact of each option on your long-term goals.

Foreclosure vs. Bankruptcy
First and foremost, you want to keep in mind that your credit score is unique to you. Because your credit score is a sum of your complete credit history, no two consumers will have the same financial impact profile to profile.

FICO recently released a report that displayed the impact of various negative items on a person’s credit profile. They used a sample profile with the same credit score (680) to show the effect of foreclosure versus bankruptcy. Under bankruptcy, the “person’s” credit score dropped between 540 and 560. With a foreclosure? – 620 to 640.

A Chapter 13 bankruptcy’s “wage earner’s” option can, in some instances, bode more favorably than a property foreclosure, showing a future lender your willingness to repay a debt on a restructured scale. On the other hand, a foreclosure may illustrate a greater desire to walk away from your property and your credit agreements.

If you plan on filing a total debt elimination, or a Chapter 7 bankruptcy, a foreclosure could very well be a byproduct of this decision. While the opportunity to obtain a clean slate may be a tempting proposal, the immediate impact on your living situation is evident. Although foreclosure proceedings generally render a 3-month notice before eviction, what is your plan after this grace period? How will a lower credit score affect these plans?

Conclusion
As stated above, if you’ve fallen behind on your mortgage payment, the first step you want to take is working with your lender to restructure payments and avoid damage to your credit entirely. Bankruptcy and foreclosure are the last resort. If your mortgage agreement is beyond repair, you may face choosing between a foreclosure and bankruptcy. Based on information released from the credit authority, FICO, a foreclosure may be minor damage and less time on your credit report overall.

However, because every situation and credit profile is unique, deciding based on your immediate and future financial needs and goals is essential. Before deciding, speak with a finance expert about your situation and what might work best for you.

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