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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
Wow that needs to be taken off of your credit report! The M9 will need to be taken off by a credit professional because it requires that your whole credit report be analyzed to determine what the best way to have it removed would be.
Posted on: 15th May, 2008 08:08 am
Sorry last two post where from me.
Posted on: 15th May, 2008 08:13 am
i have a question. we are having trouble paying our seconde mortgage but not our first. in this depressed market our house isn't worth what we bought it for. will the second mortgage forclose on our first even though the first is current? also, the first and second are with the same company. popular mortgage servicing inc. please advise.
Posted on: 22nd May, 2008 09:57 pm
Hi Siciliano,

Welcome to the forum.

Second mortgage is a secured loan. So, even the second mortgage lender can foreclose although your first mortgage is current. But as your the first and second mortgages are with the same company, you need to consult with the company and see whether they can offer you any solution.

BTW can you tell us about the type of mortgage that you have and the interest rate? If you are paying higher interest rate then you can refinance the present mortgage with a lower monthly payment.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 22nd May, 2008 10:42 pm
Thanks Larry

I have an 80/20 for 630,000. The first is 505,000 and the second is 125,000. Interest on the first is 7.38 and the second is 10. something. Is a 125,000 really going to foreclose on a 505,000? I tried to work something out but now since our credit has tanked because of late payments we can't. The representative on the phone said that the 2nd won't forclose on 505,000, probably just charge it off and issue us a 1099. If thats the case I'm fine with it, but want to expert advise and people familier with these issues. My home is probably worth 590,000. now with the housing prices going down. Now that you have all the info, what do you recommend?
Posted on: 23rd May, 2008 01:23 am
Hi Siciliano,

Welcome back.

Probably as both the loans are from the same mortgage company that is why they are not foreclosing. If the second mortgage is charged off then it does not mean that the debt is forgiven. You still owe it and need to pay it. But if the mortgage company charges of the second mortgage then you need not to sell the property but try to pay the due debt. That will have a good effect on your credit report.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 23rd May, 2008 01:46 am
Larry,

If they charge it off, can I just do a bankruptcy and put it in with that?
I just cannot afford the second mortgage. Our primary business was real estate and as you know it's taken a nose dive. I thought there was legislation where they were going to buy high interest rate loans and refinance? any word on that? I would like this company to do an "in-house" refinance and put it all together at a lower interest rate. You would think they would want to, but in the absense of that I figure i'll pay the first, and try to work something out later with them? I did get a notice of default but it wasn't from my mortgage company, it was some other company. please advise.
Posted on: 23rd May, 2008 10:12 am
Welcome Back Siciliano.

You need not to file bankruptcy. I feel refinance is a good option for you. Talk with the mortgage company and request for refinance. If you can refinance both the loans into one that will be good for you.

If your mortgage company can not help you out with refinancing then you can shop for lenders for refinancing.

Let me know if you have any further questions.
Posted on: 24th May, 2008 04:07 am
hi, can a mortgage charge off turn into a foreclosure?
Posted on: 21st Jul, 2008 11:51 am
will a charge off mortgage put a lien on the property or will it only show up in the borrowers credit report? thank you.
Posted on: 21st Jul, 2008 11:52 am
Hi Jenny,

Welcome to our forums.

As far as I understand, a charge-off cannot turn into a foreclosure. I mean the lender has issued a charge-off because he thinks he won't go after your debt anymore though you actually owe it. Charge-off implies your debt is considered as uncollectible. So be rest assured, as the lender won't foreclose.

The charge-off will show up in your credit report for 7 years. However, if you pay off the charged-off debt within a few months/years, you can negotiate with the lender to update the charge-off status on the credit report as "paid charge-off" or "settled charge-off". An even better option would be "pay for delete" but that's only possible if you quickly pay off the debt.

Good luck
Posted on: 22nd Jul, 2008 05:46 am
i am not able to pay my second loan due to my husband's recent illness. we are considering filing bankruptcy. my question is will we be responsible for the 2nd loan if we continue to pay for the 1st loan and stay in the home?
Posted on: 30th Sep, 2008 04:01 pm
Hi guest!

Welcome to the forums!

If you file a bankruptcy, then both the loans will be included in it. Then you will not be able to live in that house. However, if you keep on paying the first loan, still you will be responsible for your second loan as well. You will have the option of short sale and deed-in-lieu provided if the lender accepts.

Feel free to ask if you have further queries.

Sussane
Posted on: 30th Sep, 2008 10:55 pm
If I have a charge off on my credit report due to a foreclosure, can I be
forced to pay from via my direct deposit bank account
Posted on: 08th Oct, 2008 07:55 pm
Hi glenn!

If your original mortgage lender has charged off the debt to a servicing agency, then you will have to pay the debts to the servicing agency. They will pressurize you to pay in any way and clear off the debts.

Thanks,

Jerry
Posted on: 10th Oct, 2008 03:44 am
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