What is the Difference Between Bankruptcy and Foreclosure?

The main difference between bankruptcy and foreclosure lies in their consequences and the scope of their impact on debts and property. Here are the key differences:

• Scope: Foreclosure affects only the home, while bankruptcy affects all debts.
• Debt Elimination or Repayment: Bankruptcy allows debtors to either eliminate their debts (Chapter 7) or establish a repayment plan for their debts (Chapter 13). In contrast, foreclosure focuses on recovering the mortgagee's money upon default.
• Initiation: In bankruptcy, the debtor initiates the process by filing a bankruptcy petition. In foreclosure, the lender initiates the proceeding to repossess and sell the property.
• Credit Impact: Both foreclosure and bankruptcy negatively affect credit, but a foreclosure remains on your credit report for 7 years, while a bankruptcy remains for 10 years.

When a debtor files for bankruptcy, an automatic stay is imposed, which suspends foreclosure proceedings until the bankruptcy case is resolved in court. This may allow the individual to keep their house, depending on their financial situation and the specific type of bankruptcy filed. The two most common forms of personal bankruptcy are Chapter 7, which covers all unsecured debt, and Chapter 13, which restructures debt so that monthly payments are manageable.

Comparative Table: Bankruptcy vs Foreclosure

Here is a table comparing the differences between bankruptcy and foreclosure:

Both bankruptcy and foreclosure have negative consequences for your credit score, but bankruptcy is generally considered the better option because it provides a more comprehensive debt relief solution and may allow you to keep your house.