Tuesday, April 8, 2008

Foreclosure or Bankruptcy? Bankruptcy or Foreclosure?

One can lead to another and some people may even choose bankruptcy to protect them from foreclosure. But which is, dare I say “better”? You’ve got to look at the long-term consequences to decide.

It’s probably safe to guess that anyone facing foreclosure has other financial struggles as well. But foreclosure doesn’t have to lead to bankruptcy. Both options do affect your credit score. The difference is the impact.

A homeowner who is stretched too thin may decide to skip the mortgage payment and continue regular payments to other debts that impact their credit rating such as cars or credit cards. A mortgage, or even a foreclosure, is one ding to a credit report. Though a big ding, credit scores are hurt more when payments are missed on multiple accounts.

A spokesperson for Fair Isaac credit reporting put it this way for CNNMoney.com, “while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy," said Craig Watts…"The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy".

Watts also said. “It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again. After abandoning a mortgage, a person may be able to buy a new house in two years or less."

Note that Watts isn't saying someone could recover from bankruptcy in just three years. Bankruptcy can stay on your credit report for up to 10 years.

It used to be that advice was always "do everything you can to protect your home." It's interesting how that's changed. The new mantra is "do everything you can protect your credit rating."

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