Will “Forgiven” Debt Affect My Credit Score?

From the mailbag: 

If I owe $175K on a VA mortgage on my primary residence and the bank agrees to “forgive” $25K because the best I can sell my house for is $150K will this negatively affect my cerdit rating?

Most likely this will adversely affect your credit. The extent will depend on how the bank reports the “cancellation”. They could report it as a foreclosure, short sale, deed in lieu of foreclosure or anything in between. If it is a foreclosure then of course that would be the worst case scenario in terms of credit score. Even though a short sale and deed in lieu of foreclosure may not affect your score as adversely as a foreclosure it really shouldn’t be too big of a difference. Even though I can’t say by how much your score will fall, don’t be surprised by what you see.
Even though the reporting may vary, in the future, when you go to apply for a mortgage, the lender will most likely view all three as a foreclosure. An instance where you were not able to meet the mortgage payment and hence had to be releived of the obligation through legal action. Regardless of what your credit score is at that point or whether it says foreclosure or not, the new lender will treat it as such.
This isn’t a dire situation though. Lenders will still give you a loan but only after a minimum of three years after foreclosure. In fact you can get a 100% loan today three years after foreclosure, as long as you have maintained good credit since that time. I can’t say whether these loan guidelines will not change in the future.

Faulty Credit Reporting and the Growing Trade in Discharged Debt

I see faulty credit reporting all the time. After pulling credit, I (or Aimee) will review the credit report with the borrower.  It is amazing how many times we see active accounts which have been discharged during a bankruptcy. 

Quite honestly, I’m not sure how much this affects the credit score, but it certainly will not help.  Oftentimes things go smoothly, as long as the borrower has paperwork to prove the debt was included as part of the bankruptcy. However,  with lending standards tightening, you can never be sure.

This Yahoo! Finance article “Prisoners of Debt“ has helped me understand how discharged debt can reappear in your credit report as an active account. It has to do with dubious practices on behalf of creditors and the resulting growing trade in discharged debt papers.

Traditionally, once a debt has been discharged the account is supposed to be worthless. However, creditors are still selling these worthless papers to buyers. It seems to appear that as this sale occurs because someone somewhere believes they will be able to collect on the discharged debt. The article I mentioned above has stories of people who were forced to pay on dishcarged debt when they were about to buy a home.

What is sad is that many people are being trapped into paying back debt they were legally absolved from. This seems to be a thriving cottage industry and some of the major players in this market are even listed on Nasdaq! Wow.

So, what does it mean for you? It means you need to be proactive. Keep tabs on your credit report by doing an annual credit review. If you find errors promptly contact the creditors and ask them to update the report. Alos, make sure you keep records of all your communication (take summary notes of telephone conversations, keep copies of any letters).

Further Reading:

  1. How to Protect Your Credit Score When Your Loan is Sold
  2. Top Five Credit Misconceptions
  3. Learn Your Rights, Fight Erroneous Credit Reporting
  4. Additional resources click here.

Bad Credit Can Cost You Your Next Job and Your Dream Promotion

Not only can bad credit cost you big bucks, it could even cost you that new job you want or the promotion you’ve been working so hard to get.  It’s hard to believe, but it’s true, more and more employers are pulling credit and screening out job applicants.

I vaguely remember a conversation from a few months. The person I was talking to mentioned how he needs to get his credit in order so he could get a better job. I had to give my thumped look. You don’t often get to see my thumped look.

I know business owners and self-employed people may need to furnish credit reports for business loans or big contracts. Also I was aware of top level sales executives at large companies needing to furnish a credit report annually so the company feels comfortable with their money and debt management.  But I was not aware of how this practice had trickled down to include regular folks in regular jobs. 

At first I didn’t think employers could do this and I wasn’t sure it would prove to be terribly informative. But I found they could. I also did some research on how extensive this thing was and found that employers are increasingly relying on credit reports to screen out job applicants. Here is what I found on the Bankrate.com website:

More and more employers are using credit reports to screen employees. The use of credit checks has increased 55 percent since 2000, according to a 2006 national survey conducted by Harris Interactive for Spherion Corp., a leading recruiting and hiring firm.

So what are employers using your credit reports for?

… “many companies use credit reports primarily for authentication of the name and address history of the applicant, perhaps paired with a separate search of criminal history, rather than for the credit performance of the individuals being considered, especially if there are no significant credit issues.”

Again, is this legal? According to the FTC, it is permitted as long as the employer receives a written permission to pull credit. I guess it’s part of the background check.

There is more at stake with the credit report, manage it well.

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