I remodified my home loan and the second was closed out.?

About 15 months ago our modification was complete and the second was closed out. I called the lender who said it belonged to B of A and got in touch with them and they told me it was zeroed out. I asked them to send me a confirmation letter. My credit was dinged about a year ago and now another lender has taken it over and marked my credit again. "KD" It says on my credit report that it was charged off. I called them and they told me I still owe the money and how I wanted to repay it? I told her that the loan was supposed to be closed out and done with. She says they might persue litigation. My home is already valued at half of what I owe on the first remodified loan. Maybe I should of sold it short? I didn't make an agreement with the new lender. Can this become a big deal? Can they put a judgement on my paid possessions?