Home Debt Relief Personal Loans Refinance Home Equity Loans Loan Modifications Credit Repair Insurance Bankruptcy and  Foreclsoure

Which Is Worse: Bankruptcy or Foreclosure?

Digg  Add to del.icio.us  Facebook  StumbleUpon  Technorati   Reddit   MySpace

Like many Americans, you may be swamped in debt. You are behind in your mortgage payments and your lender has sent you a notice of foreclosure. You cannot pay your bills even though you have a job and an income. You have the dreadful sense that the Titanic is headed straight for the iceberg and soon your ship will sink. But what options do you have to avoid disaster? Is it better to go through foreclosure or declare bankruptcy? Will filing bankruptcy stop foreclosure and give you a chance to save your home?

Option One: Foreclosure

If you decide to let your lender take your house, then your best strategy is to open a dialogue with your lender and prepare for a soft landing. Negotiate an equitable eviction date - depending on state law you may be able to remain in your house for months beyond the foreclosure date.

Perhaps your lender will agree to a short sale, whereby the property is sold at below its equity and the bank writes off the difference. For example, if your principal balance on your mortgage loan is $225,000 and your house has lost value and can be sold for only $190,000, the $35,000 difference is something that the bank may be willing to write off.

Whether you can get a short sale, or if you go through with foreclosure or give your lender the deed, your credit rating will likely take a hit of 200 to 300 points. The event will remain on your credit report for seven years.

The advantage to a foreclosure is that only your house is affected. Other assets such as investments, a second home, or your car, are untouched. A foreclosure means that you will have to find a new place to live but otherwise your life can continue as before.

Option Two: Chapter 13 Bankruptcy

Your other choice is to file bankruptcy. Bankruptcy proceedings are now regulated by the 2005 U.S. Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which toughened the U.S. Bankruptcy Code. Bankruptcies are litigated in the United States Bankruptcy Courts, which are a part of the District Courts in the United States. Can you file bankruptcy yourself? Yes, but the process is complex and most individuals seek the guidance of a bankruptcy lawyer.

Because you own a house and you have income, you will probably consider Chapter 13, which is a debt-restructuring vehicle that requires you to create a court-approved payment plan to pay off your debts over several years.

One feature of Chapter 13 is that it can postpone foreclosure. A properly filed Chapter 13 petition "automatically stays" (stops) most collection actions, including foreclosure. You can stop foreclosure proceedings and create an opportunity to pay off delinquent mortgage payments. Your delinquent mortgage payments will not be erased, but you may be granted additional time.

Under a Chapter 13 discharge, between 20 and 50 days after you file the Chapter 13 petition all of your creditors meet with the court-appointed trustee. A payment plan is created which, if approved by the court, will replace your current debts. As long as you make the required payments to the trustee, your creditors must abide by the plan and cannot contact you regarding your debt.

How About Your Credit Score?

Bankruptcy is a major life-changing event. Your primary task after filing bankruptcy will be to rebuild your financial life. A bankruptcy will devastate your credit rating and stay on your credit report for ten years. But the good news is that you can start to build better credit as soon as your bankruptcy is closed.

Bankruptcy or foreclosure? If you are determined to stay in your house, bankruptcy may be an option. If you are ready to pack up, foreclosure might work better. Your best bet is to get sound legal advice from a bankruptcy attorney.