Accepting Unsolicited Loan Modification Can Affect Your Credit Report or May Have Tax Implications? Ask Before You Accept
Posted by: Kenny Tan
July 31, 2011
Topic: Loan Modification
But they are not doing this out of generosity. In most cases, the borrowers to whom they've offered unsolicited loan modifications are people with option ARMs. Banks are concerned about holding on to too many "toxic" loans and finally more willing to convert these option ARMs into fixed rate loans. Banks consider the option ARMS "toxic" loans. Unless these loans are modified, they are very likely to end up in their REO department.
Chase is one such bank.
Before you decide to accept the banks' generous offers, make sure you ask them questions about the effect of the loan modification onyour credit scores and tax implications after your loans are modified.
Check out this blog on bankrate.com that explains how in some cases.
Essentially how the banks report the loan modifications may in some cases reduce your credit rating or cause you to be denied a car loan or a lease due to the reporting. (see my blog on a woman who said to the bank "Please don't modify my loan" but they did it anyway).
How the bank reports the loan modification may mean a world of difference. For instance, if the bank does not reduce the principal balance or forgive any past owed installments, the report may show as an "increase in principal balance" on that account which tends to reduce your credit rating.
Under the current tax exemption law which is expected to sunset in 2012, any forgiveness in debt such as the case of principal reduction gets reported as a discharge of debt which is the same thing as an income which gets reported on 1099. Also, as the tax exemption law only applies to principal residence, if the mortgage pertains to a rental property for instance, there's no tax exemption regardless of the year in which the loan modification is obtained.
