When you have to decide upon foreclosure vs bankruptcy, the first thing to ask yourself is whether you'd like to keep the house. If you're keen on keeping the house, filing for Chapter13 makes sense. This helps you to pay off all or part of the mortgage, especially the amount by which you're behind on the loan. The payoff period in Chapter 13 is quite short, that is within 3-5 years. However, you'll have to go through credit counseling session within 6 months prior to the date of filing bankruptcy. Then you'll have to pass through the Means Test which confirms whether you're eligible for chapter 13.

When you file for Chapter 13, you must create a repayment plan and submit it with your petition. The court appointed trustee will then review the repayment plan with your attorney and your creditors. The trustee will then negotiate with your attorney and lender if any alterations to the repayment plan are needed.

Once your bankruptcy petition has been filed, your lender is barred from suing you in foreclosure during the bankruptcy proceeding and for at least 30 days after your case has been closed.

The question of foreclosing at the end of the 3-5 year period doesn't arise if you have cleared the debt and are able to continue paying down the outstanding balance. However, you will have to wait 1-2 years after your bankruptcy case has been finalized to try for a refinance.

Chapter 13 shows you've tried to clear debts instead of avoiding them, and this has a more positive impact on your credit report than foreclosure does. However, if you fail to reorganize your debts and catch up with the payments, the bank is likely to foreclose after your bankruptcy, and then you'll have both bankruptcy and foreclosure on your credit. So, you shouldn't miss any payments under the Chapter 13 plan or the court will dismiss your case and then you'll have no option but to go through a foreclosure.

Another positive aspect of Chapter 13 is that it helps you keep your home. But when you end up in foreclosure, you may lose the house and if the house doesn't sell for the total amount of the loan, the lender will file a deficiency judgment. This will be reported on your credit report and is likely to affect your credit.

There are tax issues involved with deficiencies. If the lender forgives the deficiency you will have to report the forgiven amount on your Federal income taxes. However, even though you report that the deficiency was forgiven, does not mean you will have to pay taxes on it. As of 2009, the IRS does not require you to pay income tax on money forgiven due to a foreclosure.

Once you file bankruptcy, the creditor/lender can no longer sue you to collect on a debt until the it has been discharged. Once it has been discharged, you can rebuild your credit in 2 years. By the time you get served with the summons for foreclosure, your credit score has already taken a hit. By the time your lender takes possession of your home after the sheriff's sale, you will be facing at least another 5 years of rebuilding your credit.

Bankruptcy stays on your report for 7 years, but it doesn't affect your credit rating after the initial hit. The best thing is, since you get an automatic stay from collection activities after you file, your credit score will freeze until the bankruptcy process is complete. So, it's better to have a 650 score with bankruptcy instead of a 480 score and a foreclosure.

Bankruptcy is an option that will help you to avoid foreclosure. But when it comes to deciding on foreclosure vs bankruptcy, you have to decide which option will work better in your particular situation. So, the best thing to do is to contact your lender and start to negotiate a loan modification as soon as you realize you cannot afford your current mortgage payments any longer.