Bankruptcy v/s foreclosure - the choice is just not easy! Basically the two are loosely intertwined. He choice would then depend on ones' individual need & situation. Let us begin with clarifying the basics of these two legal phenomena.
Bankruptcy is what the borrower decides for himself. You can declare bankruptcy under Chapter 7 or Chapter 13. Here you declare yourself bankrupt - that is, you say that you do not have the finances to meet the debts. Chapter 13 is preferred over Chapter 7 as it leaves a scope to file the latter if need be.
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Foreclosure is filed by the lender in case the borrower does not pay the monthly payments. But filing of a foreclosure does not mean that you have become bankrupt already. Even if the borrower has got the 'Notice of Default' there is nothing to get panicky. Until the actual auction takes place the home owner has time to work out the scenario. They have several options like short sale, deed in lieu of foreclosure, loss mitigation, loan modification, forbearance, etc. Particularly short sale is done only when the home owner has lost all hopes that he / she can afford the home. Now in that case, it is not necessary that your debts would get cleared off with the short sale. Some times the mortgage amount is higher than the current value of the house. Though, some lucky home owners stand a chance that the lender 'lets go' the remaining amount.
The wisest thing on the part of the home owner is to talk out the financial constraints with the lender in time, that is, before the lender files a 'Notice of Default.'
In case you think that filing a bankruptcy would save you from the foreclosure and would let you keep the house, it is not true. The only condition on which you can continue to keep the house is to pay back the loan amount. Yet, bankruptcy helps in bargaining some time from the lender. Actually, bankruptcy lends you a legal shield where the lender is forced to stop all legal actions he / she is taking up against you. That way, you get some time to help your self to arrange some money. Then another valid point is that bankruptcy discards some unsecured loans that further save you some more money for the home mortgage payments.
In both the alternatives, you have a bad credit score. A foreclosure stays on your credit score for 7 years and bankruptcy stands for 10 years. The home loan lenders though hold foreclosure as a rather bad credit remark than bankruptcy.
At last, we can only say that hasty decisions can be very harmful. You must consult an experienced lawyer before you take any further step!
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