When facing financial hardship, one of the first questions to ask yourself is: What is my house worth? If your home’s value has decreased significantly and you have little to no equity, it might make sense to walk away from the investment. In this case, allowing the lender to foreclose may seem like a logical choice.
However, before opting for foreclosure, consider if a short sale could be an option. In a short sale, the lender agrees to accept less than what is owed, allowing you to avoid the long-term damage of foreclosure on your credit score. Keep in mind, though, that you’ll lose any remaining equity in the home.
How Far Behind Are You on Your Mortgage?
The decision between foreclosure and bankruptcy can also hinge on how far behind you are on your payments and whether you’re upside down on your mortgage. If your financial struggles are temporary, and you expect to regain stability, filing for bankruptcy might help you keep your home.
Chapter 7 vs. Chapter 13: Which Bankruptcy Fits Your Situation?
- Chapter 7 bankruptcy is designed for individuals who are only slightly behind on payments. It can temporarily stop foreclosure and give you the breathing room needed to catch up. However, Chapter 7 bankruptcy is means-tested, meaning not everyone will qualify based on their income level.
- Chapter 13 bankruptcy is more accessible to a wider range of individuals. This form of bankruptcy allows you to set up a repayment plan that lets you catch up on missed mortgage payments over time. The key benefit is that you can stay in your home as long as you continue making mortgage payments while adhering to the repayment plan approved by the bankruptcy court.
Impact on Your Credit Score
One of the biggest concerns when choosing between foreclosure and bankruptcy is how each option will affect your credit score. A foreclosure will typically drop your credit score by at least 200 points. This can have long-term consequences, making it difficult to secure loans or even rent a new home.
Bankruptcy, on the other hand, impacts multiple accounts, not just your mortgage, so it will generally take more points off your credit score. However, if bankruptcy allows you to keep your home, the drop in your score may have less immediate impact since you won’t need to apply for new housing.
Making the Right Choice for Your Situation
There’s no one-size-fits-all answer to the question of whether foreclosure or bankruptcy is the better option. It all depends on your unique financial circumstances, how far behind you are on mortgage payments, and whether you believe you can catch up.
If your financial challenges are likely to continue, foreclosure may provide a more immediate exit from your housing difficulties. On the other hand, if you anticipate getting back on your feet soon, bankruptcy can offer the opportunity to keep your home and protect your long-term financial future.
If you’re struggling with mortgage payments and considering foreclosure or bankruptcy, Law Offices of Terrence Fantauzzi is here to help. Call us at (909) 552-1238 to discuss your options and get personalized advice for your situation.