When a debtor fighting foreclosure receives a loan modification there is a possibility that it may have a negative impact on their credit report. Mortgage modifications are reported to the credit bureaus in one of two ways:
- Settled or charged off. If you were fighting foreclosure and received a mortgage modification that decreased the principal of your original mortgage, the lender will probably report the original mortgage as settled/charged off. A settled/charged off account is a large negative mark on your credit report but not as negative as an actually foreclosure.
- If your mortgage modification does not include a reduced principal balance, then the lender may not report it as settled/charged off. In this case your credit report will only reflect any late payments made while you were fighting foreclosure.
Before you accept the terms of the mortgage modification speak with your lender about how the mortgage modification will be reported. You may be able to negotiate with the lender and get them to agree to NOT report the mortgage as settled/charged off. But even if the lender reports your mortgage as settled/charged off, it will only remain on your credit report for seven years and will become less important as time passes. For debtors who are considering a mortgage modification, it is important to make sure that the new loan will be affordable so that you can avoid foreclosure in the long-term. If you feel that your mortgage modification is not affordable please do not accept it. Remember, you can avoid foreclosure and discharge unsecured debts using bankruptcy. Speak with your bankruptcy attorney to find out how.