Is Bankruptcy Worse Than Foreclosure for Your Credit Score?

Credit crisis Q&A: “Is bankruptcy worse than foreclosure for your credit score?”

This is a very timely question, considering all that’s happening in the world at the moment.

Foreclosures have been skyrocketing for years now, and have shown little sign of slowing, despite all the government intervention to stop the epidemic.

So what does it mean for consumers who experience a life-changing event such as a foreclosure?  And what about those that must file bankruptcy?

Well, these two events are two very different things that impact your credit score disproportionately.

Obviously, losing your home to the bank is a huge negative from a credit perspective, but filing bankruptcy is a different level of distress.

Let’s break it down; when you experience foreclosure, the tradeline associated with your mortgage goes into the red.

While it’s a huge and highly significant tradeline, it’s usually just a single tradeline, perhaps two if you’ve got a second mortgage.

Regardless, it’s makes up a relatively small portion of your overall credit history, while a bankruptcy covers all of your credit accounts.

As a result, a bankruptcy will have a much greater impact on your credit score, and is much worse than a foreclosure because all of your accounts will be charged off.

Also keep in mind that many bankruptcies remain on your credit report for 10 years, while a foreclosure remains for just seven years (how long do negative items remain on credit report).

While the associated credit score ding can vary, a foreclosure may impact your credit score by 150 points, while a bankruptcy can lower your score by 300 points or more.