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A plain "foreclosure" on a credit report can be devastating to a score and greatly reduce ones chances of getting a future mortgage.
However, if you pay back what is owed to the company before final foreclosure then the mortgage is considered redeemed, or kept open. This is when the term listed on the credit report is "foreclosure redeemed," which has less of an impact on the credit score.
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What appears to have happened is a temporary stalemate. Since they were not able to produce the original paperwork, they lack standing to sue. Under this situation the court could have dismissed the case without prejudice (meaning that they could refile at a later date if the find the original paperwork). If the court has not dismissed the case, then your lawyer should move to dismiss for lack of prosecution.
Without more facts I am not able to speculate as to whether they have been bailed out. If they never find the note, then that means that they cannot enforce it. If they cannot enforce it, then in essence you are off the hook.
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