Is a Bankruptcy or Deed-in-Lieu Worse for Your Credit Score?

Between the impact bankruptcy can have on your credit and a DIL’s own credit effects, it’s difficult to say just which is worse. Generally though, bankruptcy comes with a steeper drop in credit score than a DIL. A bankruptcy also stays on credit histories longer.

A Closer Look at Bankruptcy

There are two types of Bankruptcy: Chapter 7 liquidation and Chapter 13 reorganization. Maximum income limits dictate whether you can file for Chapter 7 liquidation bankruptcy or must file for Chapter 13 reorganization bankruptcy.A bankruptcy itself can reduce credit scores by 130 to 240 points. Chapter 13 reorganization bankruptcy comes with a three- to five-year repayment plan that allows you to pay up on things like late mortgage payments, and thus allows you to keep your home. Bankruptcy stays on credit reports for up to 10 years.

A Closer Look at Deeds-in-Lieu of Foreclosure (DIL)

Foreclosures, short sales and deeds-in-lieu of foreclosure (DIL) usually cause an 85 to 160-point drop in credit scores, which is a smaller drop than bankruptcy. But giving your lender a DIL to avoid foreclosure means giving up your home entirely. Foreclosures, DILs, and short sales generally last only seven years on your credit report.

How Long Will You Wait to Buy a Home

With a bankruptcy, it generally takes about two to three years before you’ll be able to qualify for most federally backed mortgage programs as well as non-federally backed, or conventional, mortgages.

There are programs available that may even be able to get you a mortgage the day after your bankruptcy, but be cautious as they are usually run by high-interest ‘sub prime’ lenders.

After a DIL, mortgage qualification can take from two to four years, depending on the size of the down payment being made.

Things to Consider

It’s really up to you and your specific circumstances whether bankruptcy or DIL is worse. Bankruptcy may be better than a DIL if you want to keep your home. But if you only need to reduce your expenses and intend to rent while you pay things down, then a DIL may be preferable.