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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
If you sell your house and pay off the mortgage, how much does this effect your credit to the better?
Posted on: 09th Nov, 2008 05:55 pm
Hi MEME!

This will depend whether you are selling the property or the lender. If you sell off the property and pay off the loan without any deficiency, then I don't think your credit will be affected. In case there is a deficiency which you cannot pay off, then the lender may place a lien on the property and liens will surely affect your credit. If you are going for a short sale, then your credit will be affected by 75-100 points.

Thanks
Posted on: 09th Nov, 2008 10:14 pm
My finance went through a divorce when the market was hot. He paid his ex 175,000 through a second mortage. Now his business has slowed down alot and couldn't make the payment on the first and the second. Tried to file for bankrupcy, lawyer didn't show up for court. Backrupcy denied, now paying twice the amount the make up the payment on the first. Didn't pay anything on the second. Now the property taxes are being sent to the sencond and owe 5 times the amount to taxes. How does his situation apply to new guidelines with help from government or renigotiate the mortgage payments.
Posted on: 11th Nov, 2008 04:16 pm
Hi vickie!

Welcome to forums!

Are you speaking about the mortgage bailout program? Well, if your lender is a part of that program, then he can offer you the facilities available under this program. In case, if he is not a part of this program, then you will have to negotiate it with the lender.

Does your lender know that you are facing such a problem? You can send him a hardship letter as well.

Feel free to ask if you have further queries.

Sussane
Posted on: 11th Nov, 2008 11:39 pm
I am going thru a divorce and moved to a different part of the state. I am paying on a mobile home where i was living. I can not afford to pay rent in the new city and the mortgage on my mobile home. I can not oversee the home and had tried renting it out but ended up having to evict the tenants, so now it is empty and subject to vandalism. I still owe $30K on it. Any suggestions?
Posted on: 29th Nov, 2008 11:55 am
Hi elelover,

You can try selling the property. However you should remember that once you sell the property the mortgage will be due. You can also contact the lender and try out for a short sale or a deed in lieu foreclosure. But you should remember that the lender will not be ready for a short sale or a deed in lieu unless you default on the mortgage payments.

The short sale and deed in lieu procedures are similar. You will have to give away the property to the lender. The lender will sell the property in the market and recover the debts. Due to the market situation, there will remain a deficient amount from the sale of the property. In case of a deed in lieu, the lender will forgive the deficient amount whereas in case of short sale, you need to pay the deficient amount. To know more, check out the following links:

Avoid Foreclosure with a Deed-in-lieu.
Short Sale Affects Credit Score - how many points do you lose?

Thanks
Posted on: 30th Nov, 2008 10:18 pm
hello there: my home is currently on the market as a short sale because i haven't been able to make the payments. the second mortgage is telling me they'll charge off my loan. can anybody tell me how that will affect my short sale? thank you for your help.
Posted on: 04th Dec, 2008 02:34 pm
Hi christina,

Charging off second mortgage does not mean that the lender will forgive your payments. It only means that the second mortgage lender has sold your second mortgage to a collection agency who will in turn collect the payments from you. I don't think this will affect your short sale in anyway. To know more about second mortgage charge off, check out the following link:
http://www.mortgagefit.com/know-how/secondloanchargeoff#19964.html

Thanks
Posted on: 04th Dec, 2008 11:08 pm
We've tried several short sales, but the second - B of A - wouldn't budge on their 85% requirement. We brought the first current hoping the second would initiate the foreclosure, giving us protect from deficiency judgement in CA.

They are telling me they have decided to charge off the loan. Two Quetions:

1. How can I sell the house in this situation?
2. I assume they can't go after a deficeny judgement because they have choosen not to foreclose. Am I right or wrong?
3. The B of A agents have been telling me once written off they will consider new guidelines for a settlement.
Posted on: 12th Dec, 2008 09:57 am
Welcome CaliforniaTim,

Your query has been answered in the following link:
http://www.mortgagefit.com/second/chargeoff-mtg.html

Please check it out. I hope it will help you.
Posted on: 12th Dec, 2008 11:15 pm
I live in IN, i have filled bankruptcy but want to keep my home. I have tried to get the second lien holder to write down some of the note, but they refuse. I owe 175k on the first and 193 on the second. the home is only worth about 240k. My attorney said that I can not file on the second and stay in my home. How do I get them to write it down, I won't be able to refi because my scores will be to low after the bk. Do I stop paying the second and let them foreclose? in order for them to foreclose they would have to eat the 193k to them selves, and pay off 175k to the first lien holder just to sell it for less, right? I need help.
Posted on: 08th Jan, 2009 03:04 pm
hey larry,

did you file chapter 7 bankruptcy? did you reaffirm debts after the bankruptcy was discharged? if the second mortgage company forecloses on the property, then it will also have to pay the first mortgage company. so i don't think they will foreclose on the property.
Posted on: 08th Jan, 2009 10:09 pm
i have been told my mortgage company forgot to put a charge on my property when i remortgaged can you tell me what this means please thank you
Posted on: 21st Jan, 2009 08:42 am
Hi karencharnock,

Your query has been answered in the given link:
http://www.mortgagefit.com/refinance/charge-back.html

Please take a look. I hope it will help you.

Thanks.
Posted on: 22nd Jan, 2009 01:16 am
what happens if you have a charge off on your second mort. does that mean u can keep your house and just pay the first?
Posted on: 02nd Feb, 2009 03:07 pm
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