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Does a Foreclosure Hurt Your Credit More Than a Bankruptcy

Foreclosure vs Bankruptcy

Foreclosure and bankruptcy are both daunting to consider. However, if you are struggling to keep up with your mortgage payments, this may very well be your final option after a long financial struggle. While both will undoubtedly have an effect on your credit score, minimizing the fallout and setting yourself up for the best chance of credit repair is critical. Depending on your financial situation, one might be better than the other. If you’re facing the decision of a foreclosure or a bankruptcy, here’s what you need to know.

Lender Negotiation

Bankruptcy and foreclosure each carry a separate sense of urgency. Depending on your individual circumstance, one might be a better financial fit. Consider the status of your mortgage: Have you missed a single payment or have your progressed past the 90-day mark? Before you make a critical decision it’s important to talk with your lender first and see how they might be wiling to help. Contact your bank and explain your circumstances. If your money troubles are only temporary, it may be possible to request a period of forbearance or other available options in order to establish your financial stability. If your financial troubles are more permanent however, bankruptcy or foreclosure may be your last option.

Foreclosure vs Bankruptcy

The Impact of Foreclosure and Bankruptcy on your Credit Score

Both foreclosure and bankruptcy carry long-term consequences and should not be entered into lightly. A foreclosure will your reflect on your credit score for 7 years, while a bankruptcy will stay on your credit report for up to 10. Although it may seem like living with impacts such as these on your credit score for a decade is devastating, it is essential if you expect to rely on your credit score sometime in the future. If you are at a crossroads in your decision-making, you’ll want to consider the impact of each option against your goals long-term.

Foreclosure vs. Bankruptcy

First and foremost, you want to keep in mind that your credit score is completely unique to you. Because your credit score is a sum of your total credit history, no two consumers will have the same financial impacts profile to profile.

That being said, FICO recently released a report that displayed the impact of various negative items on a person’s credit profile. They used a sample profile with the same credit score (680) to show the impact of a foreclosure vs. a bankruptcy. Under the circumstances of a bankruptcy, the “person’s” credit score dropped between 540 and 560. With a foreclosure? – 620 to 640.

A Chapter 13 bankruptcy’s “wage earner’s” option can in some instances bode more favorably than a property foreclosure. This can show a future lender your willingness to repay debt on a restructured scale. On the other hand, a foreclosure may illustrate a greater willingness to walk away from your property and your credit agreements.

If you plan on filing a total debt elimination, or a Chapter 7 bankruptcy, a foreclosure could very well be a byproduct of this decision. While the opportunity to obtain a clean slate may be a tempting proposal, the immediate impact to your living situation is obvious.  Although foreclosure proceedings generally render a 3-month notice before an eviction, what is your plan after this grace period ends? How will a lower credit score affect these plans?


As stated above, if you’ve fallen behind on your mortgage payment the first step you want to take is working with your lender to restructure payments and avoid damage to your credit entirely. Bankruptcy and foreclosure should only be considered as a last resort. If your mortgage agreement is beyond repair you may be faced with choosing between a foreclosure and a bankruptcy. Based on information released from the credit authority, FICO, a foreclosure may be less damage and less time on your credit report overall.

However, because every situation and credit profile is unique it’s important to make a decision based on your immediate and future financial needs and goals. Before making a decision, speak with a finance expert about your personal situation and what might work best for you.

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