Many Americans facing financial crisis and falling behind on their payments are often faced with difficult questions and decisions.  Should I foreclose or declare bankruptcy? Both are considered derogatory legal actions that will ultimately damage credit scores and are a prevention from buying a home again for a set amount of time. But what’s the difference between both, and what would be the best option for homeowners facing this difficult decision?

Year sentence:  Both foreclosure and bankruptcy will do a number on your credit report and lending history. If you don’t think your credit report is important, think again! Your credit report dramatically affects your financial life if you every want to borrow money for items such as a car loan, student loan, or a credit card. A foreclosure will stay on your credit report for seven years, and a bankruptcy will stay on your report for ten years.

Leery Lenders:  Both foreclosure and bankruptcy scares lenders and can thwart future lending for awhile. Foreclosures are said to make obtaining a home loan much harder than a bankruptcy, despite the fact that a foreclosure comes off your record sooner. Mortgage lenders are leery of working with people with foreclosures, because they’re afraid if you couldn’t afford a mortgage before, you won’t be able to afford it now. If you file bankruptcy that doesn’t include your house, lenders tend to be a bit more lenient.

The Big Payback:   If you opt for bankruptcy and decide to avoid foreclosure there are some options to consider if you want to keep your house. Filing Chapter 13 bankruptcy costs a few thousand dollars if you go through an attorney, but would help you to pay off part of the mortgage that you’re behind on. Your debt would then have to be paid off within three to five years and attendance to credit counseling would be required. Although filing Chapter 13 bankruptcy would allow you to avoid foreclosure and keep your house, you would lose everything else. On the plus side, creditors can’t report your debt as delinquent, and you’ll stop receiving phone calls from debt collectors.

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This is filed under Foreclosures.

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