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Is Bankruptcy Worse Than Foreclosure for Your Credit Score?

It is a tough question to have to ask, but it is something that is coming up more and more these days: Is bankruptcy worse than foreclosure for your credit score? In today’s terrifying financial environment, a lot of people have to choose gas money and groceries over making their mortgage payments. And it’s not just mortgages; millions of Americans are in debt with credit card balances that they cannot hope to ever repay within their lifetimes.

The short answer to the question about bankruptcy versus foreclosure is that there is no short answer. While bankruptcy wipes out a good portion of your debt in one fell swoop, it also lingers as a negative on your credit report for a full ten years. A foreclosure is cleared from your credit in seven years. While this might make it a much more appealing alternative, consider trying a few things before you take either drastic step.

First of all, get copies of your credit report from the three major reporting agencies. It’s free from annualcreditreport.com, once a year, and follow steps to correct any inaccuracies using tips, guidelines and sample Dispute Letters such as those offered by Credit Elves. Get inaccuracies cleared up as soon as possible, and it might give you some breathing room for the next steps. One step to consider is looking for a reputable credit consolidation company. If you have an untenable amount of credit card debt hanging over your head monthly, consider getting rid of all of the different creditors, and having a debt consolidation company renegotiate the terms of your repayment, and possibly get the amounts reduced. If you can bring the amount owed from say, $2000 a month to $500 a month, it might ease the burden you’re now facing with your mortgage. You can also do these negotiations for yourself, if you’re comfortable with the process.

Another option is to contact your lending institution and tell them your story, asking for either a temporary reduction of the monthly amount owed or for a break on the interest rate. They might be able to work with you until you are on more stable ground financially, and at the very least, you’ll be notifying them that there is potentially trouble on the horizon and you need help. They might decide to help you by granting you “forbearance,” which allows you to have payments suspended until a later date, a date when you are not in so much trouble.

Know that if you are in too much house for your ability to repay, these options are probably not going to help. Going through a bankruptcy or foreclosure might be the only way out, no matter how painful. Know too, though, that either option is not the end of the world. You can be a renter until you can get your credit cleaned up, and with so many people in trouble these days, creditors are a lot more sympathetic than they used to be. Part of a pie is better than no pie, as far as they are concerned.

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