Loan Modifications Can Damage Your Credit Score
Loan modifications can impact your credit score negatively, making it difficult to obtain other loans or credit cards.

November 05, 2011 /24-7PressRelease/ -- Loan Modifications Can Damage Your Credit Score

If you are struggling to pay your mortgage on time each month, you might be considering a loan modification. These modifications, offered by private mortgage lenders and through a federal government program, can leave you with a new mortgage loan and a smaller monthly home loan payment.

But these modifications also come with a penalty: the process will likely leave you with a lower credit score. Those with a lower credit score may have more difficulty in obtaining car loans, new credit cards or other loans.

Why Credit Scores Are Affected

One reason your credit score might be lowered after a modification occurs is because your home lender's loan mitigation department doesn't talk to its foreclosure department.

For instance, a lender's loan modification department may tell borrowers to stop making their mortgage payments to prove that they are struggling financially. When homeowners follow this advice, the same lender's foreclosure department may report the missed payments to credit reporting agencies. The borrower's credit score then falls, dipping every time they skip a payment, even if their lender advised them to take this action.

Even when homeowners complete a loan modification their credit score will fall. This is because, technically, these homeowners have broken their original mortgage contract. When a debtor fails to pay off the original terms of the agreement, his or her credit score falls.

Chapter 13 Bankruptcy

One option to consider might be to file for Chapter 13 bankruptcy protection. This, too, will lower your credit score for a period of time after the bankruptcy is finalized. But loan modifications are far from a sure thing -- some homeowners may still fall into foreclosure or other financial trouble even if their mortgage lender grants them a modification. Under Chapter 13 bankruptcy, the bankruptcy court will set up a repayment plan that allows you to pay back all or a portion of your debts at a rate that you can afford. As long as you stick to the bankruptcy plan, the odds are good that you'll be able to clear up your financial challenges and improve your credit score over time.

Chapter 13 bankruptcy is designed to give you a fresh financial recovery. Through Chapter 13, a significant portion of your debt may be forgiven, and the payment plan will be designed to allow you to catch up on your mortgage payments and other secured debt. Only a discussion with an experienced bankruptcy attorney in your area can determine if bankruptcy is right for you.

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