Bankruptcy and Credit

• Bankruptcy relieves debtors of the legal obligation to pay certain debts. Accordingly, bankruptcy is a means of ending stress associated with collection calls, freeing up cash for savings and non-debt related purposes and stopping or delaying foreclosure. Bankruptcy is not, however, a means of cleaning up or repairing your credit. Debt accumulated before, during and after bankruptcy filing continues to be reported to credit reporting agencies and does not disappear just because you filed bankruptcy. This means that foreclosure can be applied to your credit after filing bankruptcy.
  
  

Foreclosure

• Black's Law dictionary defines foreclosure as "a legal proceeding to terminate a mortgagor's interest in property, instituted by the lender (the mortgagee) either to gain title or force a sale in order to satisfy the unpaid debt secured by the property." For those intending to surrender their property, or those who reaffirm the mortgage and fail to maintain their mortgage payments after filing, bankruptcy does not stop foreclosure, it simply stalls it. When a creditor forecloses on the property, it is free to report that foreclosure to the credit bureaus.
  
  

Surrender

• When a debtor surrenders secured property in bankruptcy, the lender may initiate foreclosure proceedings and report the foreclosure to the credit bureaus. Upon filing for bankruptcy, debtors must decide whether to keep certain secured assets or let them go. A secured asset is any property the creditor has the legal right to sell to pay a debtor's obligation. Debtors electing to surrender their homes will face foreclosure. A creditor may report the foreclosure to credit bureaus. It should, however, be listed as a debt included in the bankruptcy. Regardless of how it's listed, the foreclosure will drop off the debtor's credit report within seven years.
  
  

Reaffirmation

• If the debtor reaffirms her mortgage, falls behind on the payment and faces foreclosure, then the creditor likely will report that foreclosure to the various credit bureaus. Reaffirming a debt simply means excluding it from the bankruptcy. Debtors typically reaffirm debt because doing so allows them to keep the property serving as collateral for their secured debts. So long as the debtor is current on her loan and can pay it without imposing an undue hardship on her finances, she may reaffirm the debt.