Does Loan Modification Hurt Your Credit Scores?

When you can't afford to make your house payments,  loan modification could be the answer to your mortgage woes. In a nutshell, loan modification lowers your monthly payments by reducing your interest rate, reducing the principal of your loan or extending your mortgage's repayment terms. When the government first began pushing loan modifications midway through the recession, banks weren't exactly on board. Granted, they went through the motions because they had to, but people who met the qualifications for a loan modification often ended up losing their homes to foreclosure due to their bank's incompetence (or carefully orchestrated sabotage, as some believe). Luckily, banks don't fight loan modifications like they once did. That doesn't mean, however, that the process isn't still fraught with problems. In some situations, a loan modification may help you keep your house but hurt your credit scores in the process.

Loan Modification and Missed Mortgage Payments

If you think the government's loan modification program the Home Affordable Modification Program or "HAMP" is the only loan modification available, you'd be wrong. Some banks have their own modification programs they use to help keep homeowners in their homes. HAMP doesn't require you to miss any mortgage payments before your trial modification begins, but if your bank uses a private modification program, it can require that you fall behind on your payments before changing the terms of your loan.

Fill out modification app as soon as issues arise.

Missing payments – especially mortgage payments – is disastrous for your credit scores. If your lender requires you to be, say, 90 days' late before you can qualify for a loan modification, you can expect your credit scores to take a nosedive. Your payment history accounts for 35% of your credit score, and missing a single payment could shave over 100 points from your score. Everyone is different and the exact formula is a secret so there is no way to know how much of a hit your credit will take. This much we do know: when you stop making payments to your mortgage lender – regardless of the reason – your credit will sustain serious damage.

Trial Loan Modification Coding Problems

Before you are eligible for a permanent loan modification  you must prove to your lender that you can comfortably afford the new payment. Thus, most programs require that you make timely payments on a temporary modification before your new payment becomes permanent.

Banks report the payments you make to the credit bureaus using a code. Until recently, there was no code for trial loan modification payments. As a result, banks reporting trial modifications as partial mortgage payments. Not paying the full amount you owe makes you appear irresponsible with money and will result in credit damage. Although a trial loan modification code now exists, there is no guarantee that your lender will use it. Thus, its imperative that you keep an eye on your credit during a trial modification allowing you to catch any coding problems early on and fix them.

Loan Modification Impact and Credit Report Removal

If you haven't missed any payments and your bank codes your payments properly when reporting them to the credit bureaus, your credit report may not be affected by the loan modification.  If your credit score is adversely affected, however, take comfort in the fact that the damage isn't permanent.  After 7 years, any credit damage you sustained in the attempt to save your home will be removed. As long as you continue to pay all of your creditors on time during this period, you can expect your credit score to increase significantly after the credit bureaus remove the loan modification from your credit report.

Related Articles:

How a Trial Loan Modification Affects Credit Scores

What is a Key Derogatory on Your Credit Report?

How Much Does One Collection Hurt Your Credit Score?

What Happens If a Collection Agency Sues You and Wins?

Debt collectors love to threaten debtors with lawsuits. It's the ace up their sleeve. It seems to be ingrained in the psyche of every American to fear lawsuits the way some dogs fear thunder. When you hear that word,

you just want to go hide under the bed and shake until its all over. Most of the time, the collection agency doesn't actually sue--they just threaten to. Granted, the Fair Debt Collection Practices Act makes it illegal for a debt collector to threaten to do something they have no real intentions of doing, but you can't exactly prove someone else's intentions in court. Collectors know this and use it to their advantage.

But what happens if the collection agency does sue? Lets go over some of the potential consequences of a collection agency lawsuit.

Wage Garnishment

This is a fairly common consequence of a debt collection lawsuit. If the collector knows where you work, they can obtain a wage garnishment order through the court and serve it on your employer. Your employer can't fire you just because it received a garnishment order (that's discrimination) but if you already have a garnishment order against you, say, for child support, and your employer receives a judgment garnishment, they're well within their rights to send you packing.

Some people avoid wage garnishment by switching jobs each time a garnishment order goes through or simply by being unemployed (the most effective way is by being self-employed, but we're not gong to go there today). Keep in mind, however, that an aggressive collection agency can call you to court for a post-judgment interrogatory and force you to disclose your employer.

Property Liens

Own a house? Own a car? Watch out. Collection agencies can use their judgments to place liens against property you own. This prevents you from selling the property without paying off the lien. Of course, in some cases, collection agencies use their liens to seize the property, but these situations are still thankfully few and far between. If you have a mortgage or auto loan, your property is probably safe from seizure, as the

Own a house? Watch out for property liens.

collector would have to pay off your existing lien before it could apply any proceeds to its own debt.

Bank Levy

Just like a collection agency with a judgment can force your employer to garnish your paycheck, it can also force your bank to hand over any money you hold in checking or savings accounts. Certain funds, such as retirement money, unemployment, child support, etc. are exempt, but a collector can generally seize any and all non-exempt funds your account contains--even if doing so takes your account down to zero. And if you happen to have a joint bank account with another individual, that person stands to lose their money too. Even in states that protect joint account holders, only half of the money is typically protected.

The worst part of a bank levy isn't the fact that a collection agency can seize every penny. It's the fact that they can execute the levy over and over again until you either switch banks or the debt is paid in full. While switching banks will give you momentary relief, the collector will eventually find you and levy your new account. If it can't track down your bank account, it can drag you back to court and force you to disclose your new bank to a judge. Ouch.

Credit Damage

If the financial consequences of a collection agency lawsuit weren't bad enough, you'll have to suffer the credit consequences as well. You already know that a collection account deals a significant blow to your credit scores. Fortunately, that account can only remain on your credit report for 7 years and 180 days from the date you stopped paying the original creditor.

If the collection agency sues you and wins, however, a civil judgment shows up on your credit report. A civil judgment is a public record, just like a bankruptcy or foreclosure, and deals some serious damage to your credit scores. Unlike collection accounts, the reporting period for a judgment isn't retroactive. It begins the date the judgment is entered. Your state's enforcement period dictates how long a judgment remains on your credit report. If the enforcement period is less than 7 years, the credit bureaus remove it after 7 years. If the enforcement period exceeds 7 years, (and most do) the judgment remains for the full enforcement period. In other words, a collection agency's judgment could haunt your credit report for a decade or more.

Long story short, if a collection agency sues you and wins, you're in a world of hurt. This is why its so crucial to seek help before things reach this point and to learn how to defend yourself in court if a collection agency follows through on its threats to sue.


Related Posts:

The Debt Collection Lawsuit Threat

Funds Exempt From Bank Account Garnishment

Make Yourself Judgment Proof

Does Reporting Collection Agencies to the Better Business Bureau Do Any Good?

The Better Business Bureau takes more complaints on collection agencies than almost any other business category. Last year, the BBB received over 15,000 complaints from consumers regarding debt collectors and their behavior. So its no surprise that the BBB has quite a few articles posted on how consumers can successfully deal with debt collectors

How to Report a Collection Agency to the Better Business Bureau

Filing a complaint with the BBB against a debt collector is relatively simple. Visit the Better Business Bureau's website at www.bbb.org. Select your region of the country and select the online complaint form. Fill out the complaint form to the best of your ability. Include any actions debt collectors from the company in question have taken that are illegal. For example, any of the following complaints can be included in your BBB report:

• Calling you in the middle of the night or at other odd hours
• Contacting you after you've sent a cease and desist letter
• Using foul or vulgar language on the phone
• Calling your repeatedly, dozens of times a day
• Informing others, such as your family members or employer, about your debt

This is just the tip of the iceberg. Any violation of the Fair Credit Reporting Act can be included in your BBB report. You must include your name and contact information when submitting your complaint. The BBB does not accept anonymous complaints.

Will the Better Business Bureau Do Anything About Collection Agency Complaints? 

The Better Business bureau will process your complaint and send a copy of the complaint to the collection agency. The collection agency then has the opportunity to address the complaint and resolve the issue. In most cases, this doesn't happen. Collection agencies are notoriously cavalier about their customer relations. They know their reputation is mud just by being a collector. Thus, it benefits the company very little – if at all – to bother with BBB complaints.

If the collection agency answers the complaint, it may propose a solution which the BBB will then pass on to you. Most likely, however, it will merely forward the BBB copies of documents "proving" that the collector is right and you are wrong. Since few collection agencies have proper and thorough documentation of consumers' debts, the documents forwarded will likely be the same bogus documents collectors like to try and validate debts with. You know, those computer printouts with your name and debt on them:? This doesn't prove anything and certainly doesn't serve as a sufficient counter to your claim that the company broke the law.

Will Your BBB Complaint Hurt the Collection Agency's Rating? 

If the collection agency is a BBB accredited business and does not adequately address and resolve your complaint then yes, your report will hurt the company's rating. But, knowing how their very existence is infuriating to most consumers, few collection agencies bother to seek accreditation with the BBB. Those that do are taking a big risk. Nobody sends in a positive report to the BBB about a collection agency's performance except, perhaps, the creditor.

Should I Bother Filing a BBB Complaint Against a Collection Agency?

If the likelihood that the collection agency will even respond to your complaint is low, should you even bother filing one? Yes! Some of the larger collection agencies are accredited with the BBB. This is for the benefit of creditors who may consider hiring them. Accredited business have to respond to your complaint or risk damaging their BBB rating. In addition, if the proposed resolution doesn't satisfy you (and it won't) the company must go through mediation.

Accredited businesses recieve three free mediations, but consumers have to pay for these services. Most consumers who file complaints that reach this point, don't want to fork over the cash for mediation with the company and give up the complaint. The BBB then considers the situation "resolved" and sides in the company's favor. After all, it did everything it was supposed to do, right?

How Much Does BBB Mediation Cost? 

From what I can tell, mediation for accredited members is roughly $1500 and $3000 for non-accredited members. The consumer is supposed to pay at least half of this, plus $250 an hour for the mediator. This reeks of  a scam. Few consumers have that kind of money lying around to force a BBB-accredited business to do what's right and, in this case, follow the law. That doesn't mean you shouldn't file a complaint and keep a record of doing so. It's just one more bullet in your collection agency arsenal.

I'd love to hear from people who have filed BBB complaints against debt collectors and how those complaints panned out. Have you gone through this process? What happened? Was the collection agency accredited? Did it respond? What solution did the collector propose? Leave your stories in the comments section.

How Long Does a Foreclosure Stay on Your Credit Report?

Okay, so today I learned that some very intelligent people (loan officers and mortgage brokers, mainly) are completely clueless as to how long a foreclosure stays on your credit report. They're talking about decade-long reporting periods and I'm just sighing and facepalming like Picard. This is akin to a doctor lauding the health benefits of the Atkins diet.

You can't talk sense into some people. You just can't.

So here's the skinny on how long a foreclosure stays on your credit report: 7 years. There are three reasons that well-educated people, for some ungodly reason, seem to want to believe that foreclosures stay on your credit report for ten years or more:

1.) They're making assumptions based on general public record reporting periods
2.) They found themselves in a pinch and need numbers, any numbers, stat!
3.) They drink. A lot.

The Public Records Hangup

The deal with public records is this: the majority of public records hang around and haunt your credit report for a decade or longer. Got a civil judgment? Unless you live in one of the few states with an enforcement period of less than 7 years (in which case the reporting period for the judgment is 7 years) you're looking at a good 10 years or more of that judgment sticking around and damaging your credit. The same can also be said for bankruptcy. A Chapter 7 bankruptcy carries a 10-year reporting period. A Chapter 13 bankruptcy  however, adheres to the same 7-year reporting period that most other negative items do.

Foreclosures, because they have such a detrimental impact on your credit scores, often get lumped into the 10-year category. For example, how often have you heard someone say something along the lines of: "That will hurt your credit as much as a bankruptcy or foreclosure!" or, "Foreclosure and bankruptcy are the worst things for your credit!" See?

The truth of the matter, is that although foreclosures are public records, federal law limits them to a reporting period of no more than 7 years. So it doesn't matter what state you're in, or what type of foreclosure it was or what your loan officer/mortgage broker/real estate agent says. Foreclosures get deleted after 7 years. Period.

Foreclosure Damage for More Than 7 Years

Just because the foreclosure itself doesn't stay on your credit report for more than 7 years, that doesn't mean that damage related to the mortgage is limited to 7 years. Before your lender forecloses, you've got to default on your mortgage. And that, my friends, will skin your credit down to the bone. The mortgage default is a different entry than the foreclosure and that too hangs around for 7 years.

So, if you default on your mortgage and your lender takes 2 years to foreclose, you can count on 9 years of credit damage. Two from the default, five that the default and the foreclosure share, and two more from the foreclosure after the default gets deleted.

Do You Have to Admit to Foreclosure?

Here's where mortgage lenders get tricksy. (yes, I meant to say "tricksy"). They know that, after 7 years, that foreclosure gets deleted from your credit report and, short of digging through some old public records, there is no way for them to find out about it. So they include a question about past foreclosures on your mortgage application. Oh yeah. Don't be surprised if you dance to the bank after a foreclosure falls off your credit record only to discover that your lender wants you to fess up to it anyway.

It's considered fraud to lie on a mortgage application. But if the federal government thinks you need to be let off the hook after 7 years, shouldn't your mortgage lender do the same? My advice: download or request a mortgage application from several lenders and just don't bother filling out the ones that ask about your previous foreclosure. You can rest assured that, given your "history" they aren't going to offer you a lower rate than a lender who has no clue that, once upon a time, you lost a home.

Related Articles: 

How to Get a Real Free Credit Report Without a Credit Card

Credit Reporting Period vs. Statute of Limitations

What Happens to a Second Mortgage Before and After Foreclosure?

Credit Bureau Changed Removal Date For Collections After Dispute

Lee,

I have an account on all 3 cb. All 3 were set to be removed March 2014. I didn't remember this account so I disputed them. They all came back as verified but experian changed the removal date as November 2019. I have called them multiply times sent in the original credit report showing the original removal date but the won't help. They say there's nothing they can do because that's the information they are getting from the creditor. What can I do? Is it legal for experian not to help me even when I have the original report showing the dates were changed. This is the one thing stopping us from buying a house. Thank you

--Katrina 

The Fair Credit Reporting Act requires the credit bureaus to thoroughly investigate disputes before making a ruling. Unfortunately, this rarely occurs and sending documentation of an error doesn't seem to help many consumers. The credit bureaus mark disputes with a code and verify electronically. They don't sit and peruse your evidence.

In order to fight this properly, you'll need some sort of documentation of what the debt is. If you don't recognize it, contact the collection agency (by mail – NEVER by phone) and ask for the name and address of the original creditor. They have to provide you with this information. If you still don't remember the debt or can't put your hands on the paperwork, call the original creditor and try to get your hands on evidence of when the account fell into default. Make copies of your proof. 

Write a letter to the collection agency informing it that it has illegally re-aged your account and you have proof that the account is scheduled to fall off your report in March of 2014 – not November 2019. Use a marker to black out any personal information and send copies of your documentation and your previous credit report along with your letter. Demand that the collection agency adhere to federal law and report the correct information to the credit bureaus lest you file a lawsuit for violating the FCRA. Make a copy of the letter for your records and send the information by certified mail, return receipt requested. This way the collection agency can't claim the information was never received. 

Don't contact the credit bureaus during this time. Just wait and see what the collection agency will do. If they do nothing, its time to pull out the big guns. 

Hire an attorney to draft a letter to the collection agency threatening to sue for FCRA violations if these errors are not immediately corrected. A threat on an attorney's letterhead generally gets their attention a lot better than letters you send yourself. If they still do nothing, sue. Your documentation will go a long way in court, but I strongly doubt it would ever get that far. It's much easier for the collection agency to just correct its mistake than to fight a lawsuit. Of course, this is up to you. If you want to follow through with the lawsuit, the collection agency can't stop you. You can request that it pay your legal fees in addition to the standard FCRA damages--making this whole nightmare time-consuming but free. 

Having the name of the collection agency might help. Knowing which illegal/or unethical debt collection methods  the major collection agencies use sometimes helps me help others. Best of luck to you. 

--Lee