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My second mortgage became a charge off - What is that?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 07th Dec, 2006 03:49pm
If you haven't paid your mortgage for 6 months or you've been through a foreclosure or short sale wherein you couldn't pay off the second loan after getting rid of the first, your lender is likely to issue a second mortgage charge-off.

What is second mortgage charge-off all about?

If your second mtg lender intends to charge off the loan, it means he's declaring the debt as uncollectible. So, the lender will no longer collect payments from you. But this doesn't mean that you don't owe the money. The lender reports the debt as a loss when he files a Profit and Loss Statement (for his company) with the Internal Revenue Service. He sells off or assigns the debt to a collection agency that'll collect the payments on his behalf. So, your debt hasn't been canceled or forgiven.

When a second loan is charged off after a foreclosure/short sale on the property, the mortgage is considered as an unsecured debt since the collateral has been sold off already.

What happens after a second loan charge-off?

When a second loan is charged off and sold to a collection agency (CA), it's essential that you negotiate an alternative payment plan with the CA. In case you can't meet up with the monthly loan payments, you may settle the debt for an amount less than what you owe to the CA. Otherwise, you may face any of the consequences explained below:
  • CA may sue you: If you don't make any payment towards the mortgage, the CA may file a lawsuit against you during the SOL (Statute of Limitation) period. Once you decide to settle the debt, make sure you get a settlement agreement in writing from the CA.

  • Property retains the 2nd lien: The charge-off does not remove the second lien from your property unless you pay it off.

However, when the second mtg debt is settled, you may have to pay tax on the balance forgiven by the lender. This is because the balance forgiven or canceled debt is considered as your income. But you can avoid paying the tax provided you qualify for mortgage debt forgiveness.

Will I get 1099-C Form after a second loan charge-off?

Since a charge-off doesn't imply cancellation of debt, therefore the lender won't send you a 1099-C Form. Such a form is sent only when a lender cancels your debt and reports it to the IRS as a tax loss.

Can I remove second loan charge-off from credit report?

You can have the charge-off removed from your report only when you settle or pay off the account in full. Unless you make payments towards the account, the negative item will reflect on your credit report for 7 years. After you settle or pay the charged-off account in full, request the collection agency to update the account status as "Settled charge-off" or "Paid in full" respectively. However, a "Paid in full" is certainly better than a "Settled charge-off" status on your credit report. Know more on how to remove charge-off from credit report.

When a second mortgage is charged off, it brings down your credit score by 50 points or more depending upon the other negative items you may have on your report. The best way to get rid of this negative item is to pay down the debt asap and negotiate with the CA to update your account status accordingly.
Posted on: 07th Dec, 2006 03:49 pm
Our 2nd mortgage with beneficial was an original 15,000.00 loan. It has escalated to 32,000.00. They are going to charge off this month. My husband is disabled & 1 child disabled. The loan is only in his name. But my name is on the deed. I understand a 1099 we will receive. What happens to the charge off. with a lien against the home. Will it come off in 7 years? Thanks, Melissa
hi melissa,

if the lender wants to charge off second mortgage debt, it means that the unpaid loan amount with interest will be reported as a loss for the creditor when he uses an accounting method for calculating tax purposes.

a second mortgage charge off does not mean that you no longer owe the debt. the creditor has the right to collect the debt long after the second mortgage charge off and for this, he takes the help of a collection agency most often. usually charge-offs occur when the monthly loan payments are not made for more than 6 months.


Posted on: 07th Dec, 2006 07:43 pm
Hi Melissa,

I can feel what you are going through. But don't lose hope. Let's hope that things will be better after some time. The only thing is that you need to be confident and have patience.

Regarding the charge-off, it does have a negative affect on the credit report; most charge-offs stay on the report for 7 years and 180 days from the date of the first non-payment (under the Fair Credit Reporting Act).

Paying down the debt cannot remove the charge-off from the report. Instead, it will be updated to a "paid charge-off" after the unpaid debt is paid off. Often a creditor may accept a partial payment towards the debt and in that case, the account is reported as "settled charge-off".

Once the charge-off is marked as "settled" or "paid", the lien on your house will be removed. It does not matter if the loan is in your husband's name. If your name is on the deed and you are able to pay off a certain amount towards the unpaid debt, the creditor may settle the charge-off and remove the lien. You can thus save your home.


Posted on: 07th Dec, 2006 08:08 pm
We did a short sale in 2006 and we sold the house for what they wanted to sale for but on our 2nd they are saying that it was paid for less than owed but also shows collection account. I am trying to clear this up but when I call I get the account is paid in full then I called back to get a fax copy of our conversation and the next person told me it was a collection but charged off so now it stand as if it was a foreclouser. What can I do about this. We were suppose to close escrow tomorrow but the loan company told us Tuesday that they can't do it because this is showing like a foreclouser. Please help any advice would be appreciated.


Posted on: 08th May, 2008 09:24 am
Hi Sheila,

What you are saying is totally confusing. see if the second mortgage charge off that doesn't mean that the mortgage is paid in full. It seems it is now in collection and you should pay it off. So pay it of ASAP before going for another mortgage.

You have gone for short sale. So it should not shown foreclosure on your credit report. So pay the due debt off and ask the credit repairing agency to update your report.

Feel free to ask if you have any further questions.

Best of luck,
Posted on: 08th May, 2008 10:58 pm
Hi Sheila,

Foreclosure and collections are two different issues altogether. So, you need to get clarified as to whether the second is shown to be foreclosed or charged-off on your credit report. Depending upon how it's reflected on your report, you need to dispute inaccurate information, if any with the credit bureau. By the way, did you pay the second mortgage in full or was it a partial payment?


Posted on: 09th May, 2008 05:37 am
Hello all.

Mortgage charge off means that the lender has written it off as bad debt but the borrower is still liable to pay it off. Mortgage charge off make a bad effect on the credit report. So if it is possible, it is better to pay it off.

Why are you going for a new mortgage when you have not yet pay the outstanding balance of your previous mortgage? First pay it off. That will make a good effect on your credit and help you to improve your credit. Then you can go for a new mortgage.

Let me know if you have any further question.
Posted on: 09th May, 2008 05:57 am
Hi Melissa,

It appears you are asking a question about your husbands credit and how to improve it from this charge off that is on his report is that correct?
Posted on: 09th May, 2008 06:06 am
Hi cliff.

Are you saying charge off improve credit??? oh I do not think charge off can help anyone to improve credit. If you only pay it off that will help you to improve the credit. Isn't it???
Posted on: 09th May, 2008 06:12 am
What the bank is saying that anytime you do a short sale it shows as a charge off. But we did a short sale and sold the house for what they asked for. I did contact them and they said they had to show some where, where it says charge off but it was suppose to be on their books not my credit report that is what they told me. What is says on my credit report is that the balance was paid in full for less than the amount. I had a prepayment penalty on my loans and that is what they took off to settle the loan through short sale.
Posted on: 12th May, 2008 09:11 am
So no charge off is shown on your credit report? Also, what about your second mortgage is it paid or was it part of the negotiated short sale?

Sorry, Niics I just saw your question from an earlier post and I definatley was not saying a charge off would help your credit.
Posted on: 12th May, 2008 09:36 am
yes both 1st and the 2nd was included in the short sale. We did sell for what they wanted to sell for but on my credit report it is showing a charge off and an m9 (I don't know what this is).
Posted on: 12th May, 2008 03:44 pm
yes a charge off is showing on my credit report because they said anytime you do a short sale it is considered a charge off.
Posted on: 12th May, 2008 03:51 pm
Hi sheila,

Short sale means you have sold the property in less than what you owe. So you have not paid the full payment. As Niicss mentioned charge off does not mean that the debt is forgiven and you still owe it. So better pay the due debt off. That will help you to improve the credit report.

You should inform the credit bureau that it was short sale not foreclosure. You can also talk with an attorney on this regard.

Feel free to ask if you have any further questions.

Best of luck,
Posted on: 13th May, 2008 02:13 am
I was just informed yesterday that fha made a mistake and said that we had a foreclouser but in fact it was the people that bought it from us, they figured it was the same loan company so they thought it was us. They never bothered with pulling the deed or what ever it is called to check to see if it was cleared under our name. Our loan company that we had a short sale with agreed that it was reported wrong but to get them to clear this matter is taking forever.
Posted on: 14th May, 2008 08:42 am
Welcome back sheila,

This is really annoying and ridiculous. After you sold the property haven't they recorded the deed in the deed in the county recorder's office? the mortgage should be on their name. So how can foreclosure shows on your credit report?

Contact the Credit reporting agencies and request them for correcting Errors.

Keep us posted.
Posted on: 15th May, 2008 12:39 am
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