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Foreclosure versus Bankruptcy
By Alexander Carl on March 31, 2010

No Win: Comparing Foreclosure or Bankruptcy

935764_30449266-(2).jpgDeciding whether foreclosure or bankruptcy is easier is choosing the lesser of two evils— neither is easy, neither is particularly wanted, and both create negative consequences.

In recent times, both have become disturbingly common. You can chalk it up to a lack of fiscal responsibility, a distressed market, or both acting in combination. Regardless, it’s a problem that many of us have to deal with.

Whether you go into foreclosure or declare bankruptcy depends of the nature of your financial crisis: are your collective debts the unbearable burden, or is it only your mortgage? Some consumers tended to overestimate the affordability of homes during the housing bubble, and now the chickens have come home to roost.

By contrast, bankruptcy tends to be the result of a long string of bad decisions, resulting from a habit of overspending and underpaying.

Yet neither bankruptcy nor foreclosure develop overnight— mortgage principals don’t magically inflate when you’re not looking, and one late credit card bill won’t bring upon Chapter 7.

In both instances, consumers take on too much risk: so much so that there is nothing to fall back on in the event of bad economic times.

High risk and little safety net create a common experience for both types of sufferers, although the details differ:

In foreclosure the only asset that can be seized is the home… but what an asset that is! Full of intrinsic and extrinsic value, losing a home is like losing an identity. It also means that you must search for another residence while trudging through foreclosure proceedings.

In most types of bankruptcies, no assets at all are seized. You can keep the house and some loans are forgiven, but there still must be a way to pay back the remaining debt: from your future income. Add to a longer period of credit recovery (10 years versus 2) and bankruptcy can be far more financially crushing.

Yet foreclosure takes a huge psychological toll by taking away the home. In the end, it comes down to whether you’re willing to suffer a bigger financial or an emotional blow.

Either way, it isn’t fun.
Note: States have widely varying limits on asset exemptions when filing bankruptcy. It is best to consult qualified legal counsel for advice concerning bankruptcy.
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