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Should I file for bankruptcy if I let my home go to foreclosure?


If foreclosure seems inevitable, one potential option to explore is bankruptcy. There are obviously stigmas attached to bankruptcy, and it can have long-ranging impacts on your credit, but it's something to consider when facing foreclosure.


The immediate benefit with filing Chapter 13 or Chapter 7 bankruptcy is the court issuing of the Order of Relief. When this happens, you benefit from an Automatic Stay, a motion that postpones foreclosure while the bankruptcy is pending. (Note that the lender can get permission to lift this).


In a future blog post, we'll detail the differences between Chapter 13 and Chapter 7 bankruptcy. In a nutshell, Chapter 13 buys you time to try and create a solution, sometimes even years. Chapter 7 is for the inevitable foreclosure, and it gets you a few months to figure out your living situation. There are also tax and eligibility issues, but the main thing is that Chapter 7 bankruptcy eliminates your personal liability (debt), though not the lien.


It's absolutely important to understand that both bankruptcy and foreclosure will have a negative impact on your credit score. In general, foreclosure stays with you fore seven years while bankruptcy sticks on your record for ten. However, bankruptcy does alleviate your debt, and if you can put things back together sooner rather than later, you could begin rebuilding your credit.


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