Which Is Worse, Bankruptcy Or Foreclosure: Your Circumstances Will Dictate The Answer

Which is worse, bankruptcy or foreclosure? This question is prevalent among people who are having a difficult time financially and are looking for ways to stop a foreclosure. The way to tell when to file bankruptcy and when to let a foreclosure happen depends on your home's value and financing.

If the current home value is worth less than what is owed on the property, there will be a deficiency. If there is foreclosure and the home is sold at auction for less than owned, the homeowner is generally responsible for the deficiency. For example, if your home is foreclosed and subsequently sold for $160,000 but you still owed $220,000 on the mortgage, then you owe the bank $60,000 to cover the deficiency. However, in Arizona there is an "anti-deficiency" law that prevents lenders of the original mortgage of a person's residence to go after the deficiency in a foreclosure.

NOTE: This does not apply to refinanced home loans or second or third mortgages taken out after the original purchase date. If you have a refinanced home loan or subsequent mortgages then you are legally responsible for the deficiency. One factor in deciding which is worse, bankruptcy or foreclosure is whether you can afford to pay back the deficiency.

What Are Your Financial Goals?

Another thing to consider when deciding which is worse, bankruptcy or foreclosure, is what your financial goals are. If you have many debts that are delinquent or in foreclosure/repossession status and you want a clean break from everything and a chance to start over, then stop looking for ways to stop a foreclosure and consider filing Chapter 7 bankruptcy.

Another indication of when to file bankruptcy is when you just need a break from collectors to get your finances reorganized and get caught up on your payments. In this case, the answer to the question, "which is worse, bankruptcy or foreclosure" is "foreclosure" because foreclosure will not give you a break from your other creditors. If this is your situation, consider filing for Chapter 13 bankruptcy with a lawyer.

What Comes Next?

If you've decided that bankruptcy is the better situation for you, you next need to determine whether Chapter 7 or Chapter 13 bankruptcy is more appropriate for your circumstances.

Chapter 7 bankruptcy is the "fresh start" form of bankruptcy in which all your available assets (except for certain exempt assets) will be sold to pay off as much debt as possible and the rest of your debts are discharged. If you don't have enough income to maintain a repayment plan, Chapter 7 is probably your best option.

Chapter 13 is the reorganization form of bankruptcy. If you file Chapter 13, your debts will be put on hold while you reorganize your finances and get a repayment plan in place. Most unsecured debts will be discharged at the end of the bankruptcy payment plan, like in a Chapter 7 case. However, Chapter 13 gives you a chance to get caught up on your past-due loans for your home or vehicles that you want to keep.

Don't Stop Now — Call Us

Get more information about which is worse — bankruptcy or foreclosure — by going to our free resources section where we have many articles on Chapter 7 and Chapter 13 bankruptcies.

If you are ready to talk with someone about your bankruptcy options, Jeffrey P. Judge will be happy to talk with you. Click here to get started or call Judge Law Firm at 520-815-0281.

We are a debt relief agency. We help people file for relief under the Bankruptcy Code.