Bankruptcy vs. Foreclosure

It is a myth that bankruptcy is always worse than foreclosure. If you want to purchase real estate again, lenders typically view foreclosures, short sales and “deeds in lieu” as the same thing – they all indicate a prior inability to pay a mortgage. So, lenders do not tend to view these actions as more favorable than a bankruptcy on a credit report. Bankruptcy and foreclosure remain on your credit for the same amount of time – ten years. Here are some other important factors to consider when weighing foreclosure against bankruptcy:

• Following bankruptcy, your mortgage lender and other creditors stop negative reporting on discharged debts, improving your credit. Following foreclosure, the mortgage lender and other creditors continue negative reporting, eroding your credit.
• Bankruptcy may result in staying in your residence longer than foreclosure.
• Bankruptcy cancels debt associated with mortgage deficiencies and other debts at the same time. Foreclosure can create a deficiency debt. The mortgage lender then chooses whether to pursue you for the debt or issue a form which can result in a tax liability.
• You can be eligible to purchase a home two to four years after a Chapter 7 discharge (the court order that forgives debt). In contrast, it takes a minimum of four years to purchase a home following a foreclosure. If you have both a foreclosure and bankruptcy, you may be able to purchase after two years under some circumstances.