Chapter 7 Bankruptcy

• A Chapter 7 bankruptcy proceeding will not offer relief for some types of debt such as taxes, student loans, alimony, child support, bankruptcy costs or secured loans such as mortgages. This kind of bankruptcy can offer you relief for unsecured credit such as credit card debt. So, if you plan to keep your home and can make the monthly payments or can restructure your mortgage loan, a Chapter 7 bankruptcy can give you a few months in which to find a loan restructure or other method of paying the debt on the mortgage. However, if your monthly mortgage payment is too high for the income you make and you can't make the default payments, then a Chapter 7 bankruptcy will not solve the issue.
  
  

Chapter 13 Bankruptcy

• Under Chapter 13 bankruptcy, you negotiate with your creditors to arrange a payment plan and payback of the default debt you owe. You have a certain length of time and a payment schedule in which to complete the payment. If the payment terms are accepted by all the creditors, including your mortgage lender, then they must abide by the terms of the Chapter 13 bankruptcy. Through this plan, you can make up the default payments on the home.
  
  

Credit Damage

• For people who expect to lose the home anyway and who are concerned with either the bankruptcy or foreclosure affecting their credit history, the bankruptcy may be the worse option. Bankruptcy involves multiple delinquent accounts and information about bankruptcy will be on your credit history for 7 to 10 years. Although foreclosure also remains on your credit history for a period of 7 years, it is just one issue and does not involve several creditors like bankruptcy does, so it is not looked on as unfavorably by future creditors, especially if the foreclosure occurred two or more years previous to the new credit application. With foreclosure, credit can easily be rebuilt in less time, by paying other current creditors off on time and lowering your credit balances substantially.
  
  

Bottom Line

• If your intentions are to keep the house and restructure your default mortgage payments, a Chapter 13 bankruptcy is the better option. Of course, this means you will need to continue to pay future monthly payments in the original mortgage agreement amount. However, if you are going to lose the house even if you do declare bankruptcy, allowing a foreclosure and preventing a bankruptcy will be less damaging to your credit.