Bankruptcies and Foreclosures: The Main Differences Explained

As of April, nearly 216,000 Americans had already filed for bankruptcy in 2020. More than 335,000 homes were in foreclosure.

If you aren’t sure what the difference is between foreclosure and bankruptcy, you are not alone. Many Americans confuse the two.

Understanding what sets them apart can be important if you ever run into financial trouble. The processes and results are very different, and your ability to rebuild will depend on choosing the right one. Keep reading now to learn everything you need to know about bankruptcies and foreclosures.


Foreclosure is when a mortgage company takes possession of an individual’s home because he or she has failed to pay their mortgage. The lender exercises its right to claim the home as collateral for the unpaid loan.

How It Works

Typically, borrowers must default on their payments for a number of months before lenders take action.

Most lenders try to work with mortgage holders first to negotiate new repayment terms instead of foreclosing. If borrowers lose their income and have no prospects for regaining it or satisfactory agreements cannot be reached, the lender will move on to foreclosure.

Foreclosure is always set in motion and controlled by the lender.

In some states, lenders must prove their case to a court before foreclosure can proceed. This is called a judicial review. In other states, the courts are not required to get involved.

Once a foreclosure goes into effect, the borrower is evicted from their home. The home is then sold at auction, via short-sale, or using a real estate agent.

What You Owe

What borrowers owe after a foreclosure depends on how much their former homes sell for. If lenders can recoup the full amount of the mortgage from the sale, borrowers owe nothing. If the house sells for less than borrowers owe, the borrower is responsible for paying the difference.

For example, say you default on your mortgage with $200,000 remaining unpaid. If the lender can sell your home for $200,000 or more, you walk away owing nothing. If the home only sells for $150,000, you owe the lender the $50,000 difference between the sale price and your debt.


Individuals can apply for bankruptcy when they are overwhelmed with debt they cannot pay. Unlike foreclosures, this includes not only mortgages but:

  • Credit card debt
  • Personal loans
  • Vehicle loans
  • School loans
  • Child Support

Bankruptcy is always initiated by the individual rather than their creditors. Tristan Brown of explains that people are often afraid to file for bankruptcy, but that it can be a lifeline and a fresh start if you are facing debt you can never repay.

Types of Bankruptcy

Chapter 7 bankruptcy is when you liquidate all of your assets to pay off your unsecured debt. While this entails selling almost everything you own, it frees you of most of your debt and provides a clean financial slate.

Importantly, under Chapter 7 you will still be responsible for secured debts, such as car loans and mortgages unless you surrender those assets to the lenders. Student loans and back child support payments also remain. If you are unsure of how the procedure works, it is best to consult a chapter 7 bankruptcy lawyer before doing anything.

Chapter 13 bankruptcy doesn’t involve selling everything you own, but it also doesn’t dissolve your debt in the same way. Instead, it puts all debt collection on hold. Then, your debt is restructured so that you can repay it over a period of up to five years.

While this does not relieve you of the burden of your debt, it does make it more manageable. It can also enable filers to keep their homes, vehicles, and other assets.

How It Works

To apply for bankruptcy, you file a petition with the court and pay the associated fee. Filing fees tend to range from $250 to $350. You must also supply documentation showing your:

  • Assets and liabilities
  • Income and expenses
  • Most recent tax returns

The court handling your case will assign you a trustee who will work with you and your creditors to dissolve or restructure your debt.

Similarities Between Bankruptcies and Foreclosures

Foreclosure and bankruptcy share many similarities. Both:

  • Are ways of handling overwhelming debt
  • Negatively affect your credit score
  • Must be reported whenever you apply for credit in the future
  • Can help people start over financially

While these basic similarities can make them easy to confuse, the differences between foreclosure and bankruptcy are critically important.

The Difference Between Foreclosure and Bankruptcy

The primary differences between bankruptcies and foreclosures lie in their scope and who controls them. Foreclosure relates solely to one’s home and is controlled by the mortgage lender. Bankruptcy involves all of an individual’s assets and debts and is controlled by the individual in question.

Other key differences play out in how each option affects your ability to rebuild financially afterward.

Keeping Your House

When you foreclose, you never keep your home. It always becomes the property of the mortgage lender and then a new owner.

When you file for bankruptcy, you may be able to keep your home. This is not always the case, however. Some lenders may be unwilling to work with you to restructure your mortgage, or you may need to liquidate your home to pay off other debts.

Effect on Credit Score

Typically, foreclosing on your home causes your credit score to drop between 85 and 400 points. Your credit report will show the foreclosure for a full seven years.

The effect of bankruptcy on your credit score can vary. If your score was already extremely low due to your high debt load, you may see your score go up slightly. In most cases, though, bankruptcy will drop your credit score between 130 and 240 points.

Bankruptcy remains on your credit report for ten years. Having bankruptcy and foreclosure on your credit report will make it harder to get approved for credit in the future, but experts disagree as to which option has the most negative impact.

Effect on Homebuying Ability 

If you foreclose on your home, you are not eligible to buy another home for at least five years. At that point, you become eligible to buy a new home with some restrictions. You are not eligible to buy a new home without restrictions until seven years after your foreclosure.

There are no restrictions on future home buying when you file for bankruptcy, but having a bankruptcy on your credit report can make it more difficult to qualify for a mortgage.

Choosing Between Foreclosure and Bankruptcy

Choosing between bankruptcies and foreclosures can be challenging, but forewarned is forearmed. Browse the rest of our site for other great articles on things you need to know to make the best and most informed decisions for your life.

About RJ Frometa

Head Honcho, Editor in Chief and writer here on VENTS. I don't like walking on the beach, but I love playing the guitar and geeking out about music. I am also a movie maniac and 6 hours sleeper.

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