March 15th, 2011

Foreclosure and Bankruptcy: What’s a Struggling Homeowner to do?

13 Comments | Twitter | |

house w balloons

When you’re in dire straits with a home foreclosure notification in hand and no means to pay your mortgage, you might have another way out, MSNBC reports.

Filing for bankruptcy may allow you to keep your home if the court can work out a payment plan with the lenders. But does that mean bankruptcy is best for you?

Maybe not. There are many factors to consider when deciding on which road you should choose out of homeownership crisis. Foreclosure and bankruptcy both have significant negative impacts on your credit. But you might discover that one will be better for you in the long run.

If you’re a struggling homeowner faced with desperate options, here are the short and long-term effects of a home foreclosure and a Chapter 7 bankruptcy on your credit.

Effects on your credit score.

When it comes to your credit score, you could stand to lose more points with a bankruptcy than a foreclosure. With a credit score in the “good” range of 680, a foreclosure could knock off 105 points, while a bankruptcy could drop it a whopping 150 points. If you have a higher credit score, the damage would be worse.

Although bankruptcy seems like the worst choice for your credit, there is an exception. In cases of extreme debt and a credit score that’s already poor, bankruptcy could actually raise your score. Your debt amounts to about 30% of your credit score; filing for Chapter 7 bankruptcy discharges your debt so that amount owed is no longer reflected on your score.

Whether you face a foreclosure or file for bankruptcy, make sure you start building credit as soon as possible. The best tool available to build credit is a secured credit card, which is designed for consumers with poor credit and doesn’t require a credit check.

Effects on your credit card approval.

Filing for a bankruptcy might mean closing out your credit card accounts. Although your debt on those accounts will have been discharged, it will be difficult to get approved for a new credit card with a low credit score and a bankruptcy on file. However, MSNBC reports that bankruptcy filers could start getting credit card offers within a year or two after the bankruptcy is processed.

A foreclosure tells lenders you’ve defaulted or walked away on your house payments, which may reflect your reliability with credit card payments.

If you’re interested in applying for new credit cards to improve your credit health, be wary that both foreclosure and bankruptcy may raise red flags to future lenders. If you faced foreclosure and it didn’t affect your current credit cards, make sure to keep them active to build your credit. If you are filing bankruptcy, apply for new credit as soon as possible.

Effects on your future plans.

A foreclosure will remain on your credit report for seven years. If you have future plans to own a home again, you’ll have a minimum waiting period, usually three years, after a foreclosure is processed before you can apply.

A bankruptcy could remain on your credit report for ten years. But if you’ve managed to make a payment plan with your lenders, you’ll be able to keep your home. Otherwise, if you attempt to borrow while the bankruptcy is still on your report, you may be out of luck; lenders are adverse to recent bankruptcy filers and some lenders even have a bankruptcy filter in their underwriting.

Light at the end of the tunnel.

All is not lost.

After a foreclosure, take some time before hoping to own a home again. If unexpected life events caused you to foreclose, you may be able to get into a home sooner. If poor money management was the foreclosure trigger, reassess whether or not you can truly afford a home.

If you declared bankruptcy, speak with a lender about the circumstances of your bankruptcy. For some, bankruptcy is not a result of poor credit management, but brought on by a financial emergency, like unexpected medical bills. Lenders may be more sympathetic if your bankruptcy was a result of unforeseen life circumstances.

Bottom Line: Bankruptcy and foreclosure aren’t one-size-fits-all solutions. Before resorting to either, consider all of your options and consequences. Both will do significant damage to your credit score, but remember that you can always bounce back if you have patience, are willing to work on your credit health, and budget wisely.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.


  1. If you are going into bankruptcy you really need to tough it out and redo your habits. It is not a time for fun and games but a challenge. If you give it your all you can get out and you will be more financial educated.

    filing bankruptcy at 9:24 am on March 17, 2011
  2. Most of the time, homeowners do whatever they can to save their house. But they must know that they don’t have to struggle alone.

    Foreclosure Lawyer at 2:19 am on September 13, 2011
  3. please remove my bankruptey from 2007 thank you

    william mitchell at 11:48 am on November 4, 2014
  4. Mike

    Hi William – All the credit information you see on Credit Karma comes straight from TransUnion, one of the three major credit bureaus. If you think your Credit Karma account is displaying incorrect information, like a bankruptcy that should’ve been removed, you can dispute that information directly with TransUnion. Learn more about that here:

    Mike at 10:12 am on November 5, 2014
  5. We had to file bankruptcy in 2010 I think,because my wife became disabled. We fought for disability from
    Social security for 6 yrs. the case was closed after much mishandling by the judge and the system as a whole.
    We have been struggling for all those yrs. hoping to win our case and pay off medical bills from her and from
    Me as I had a severe blood clot in my leg and was hospitalized for a week or so,we have ins. Through my work
    But there are always co pays and some are very large so we have to make payments the only loan I have
    Besides my home is one for much needed therapeutic beds and we bought cheapest we could! I don’t want to take advantage of harp program I am almost 60 years old. It would help a lot if we could somehow just get a
    Lower payment but finance company won’t help. We are not sure what to do ,if we short sale or foreclose we
    Owe what is leftover from the sale right? Or would they take our situation into account and waive that money
    If it’s not a big amount? We have gone without just to make our payments, and it doesn’t seem like it will ever get better at this point. Any suggestions? My wife is not able to work at all.

    Donald at 8:11 pm on September 18, 2015
  6. Enola Guerrero

    Hi Donald – Please check out our advice center for any credit concerns you may have:


    Enola Guerrero at 12:31 pm on September 22, 2015

Enter your comment