Navigating Foreclosure And Bankruptcy: Pros And Cons

What's the difference between foreclosure and bankruptcy? If you're bankrupt because of the cost of your home, will the two intersect? Can you declare bankruptcy and still face foreclosure — or is one ultimately the solution to the other?

For a lot of people, the first step should be talking to a bankruptcy attorney. A bankruptcy lawyer can look at your unique financial situation and assess the right option for you; there's no one-size-fits-all solution. Maybe you can afford your home with a little budgeting. Maybe there's no way you'll ever be able to afford your house. 

Here are a few things to think about when comparing your options.

The Pros of Going Through Foreclosure and Declaring Bankruptcy

One advantage of going through foreclosure while declaring bankruptcy is that it can provide significant debt relief; for most people, their mortgage is their biggest monthly expense. Bankruptcy can help eliminate unsecured debts like credit card balances or medical bills, and foreclosure can rid homeowners of the responsibility of paying a mortgage on a property they can no longer afford. For the most part, your primary home is not included when going through bankruptcy; while the court will consider whether you can make your payments, you usually will not lose your primary home during bankruptcy.

But that can lead to potential problems. If you declare bankruptcy but still can't afford your home, foreclosure could still be on the horizon. Why take a credit hit multiple times when you can take it once?

The Cons of Going Through Foreclosure While Declaring Bankruptcy

On the other hand, there are also some downsides to going through foreclosure while declaring bankruptcy. For one, when you try to buy or rent a home, you will usually be asked if you've gone through a foreclosure. It's a separate consideration from bankruptcy.

Additionally, the process can be emotionally draining, and losing a home can be an incredibly stressful experience. In some cases, homeowners may also owe money on their mortgage even after the home is sold in foreclosure. And it's always possible that after the bankruptcy, you will be able to afford your home.

Choosing Between Foreclosure and Bankruptcy

Bankruptcy stalls the process of foreclosure, but it doesn't altogether end it. The question of foreclosure is really rooted in whether you can realistically afford your home, even after the bankruptcy. It's important to consult with a financial professional when making this decision and to explore all available options for debt relief. It's always possible that you might be able to refinance your home during bankruptcy rather than lose it. Your bankruptcy lawyer can work with your bankruptcy trustee to determine the best options for you.