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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
My bank called and asked if we want to re-mod the first (they Carry both liens), house in foreclosure right now, recording a lien to the house is their way of getting paid for both? and if they charge it off, are we getting a 1099?
Posted on: 02nd Mar, 2009 06:25 pm
Hi,

To Jennifer,

Second mortgage charge off does not mean that your lender has forgiven the second mortgage debts. It only means that your mortgage has been sold off to a collection agency who will in turn collect the dues from you.

To Grace,

If both the loans are with the same lender, then I guess, he is giving you an option for loan modification. In this process, you will get a new repayment plan in order to pay off the dues. Charge off does not mean your loan is forgiven. You will have to pay the mortgage dues to a collection agency to whom the lender has sold off your mortgage. As your loan is not forgiven, the question of 1099 form does not arise.
Posted on: 02nd Mar, 2009 11:11 pm
Hi Adonis
Thank you for answering my question.
Now, please clarify this, if a mortgage loan is charge off, my understanding is, it becomes a debt (that I need to pay) but no longer a mortgage, how can it be lien to your property, my understanding is only mortgage loans and taxes can lien your assets. Please reply
Posted on: 04th Mar, 2009 09:03 am
Hi Grace

It's correct that once the mortgage is charged off, it becomes the debt which needs to be paid off. I don't think it will be a lien on the property, however, a mortgage charge off will definitely affect your credit score.

Thanks.
Posted on: 05th Mar, 2009 12:32 am
2nd Mortgage has been charged off & sent to Collection. Is the debt considered a mortgage or simply a debt and can it be included in bankruptcy Chapter 7?
Posted on: 05th Mar, 2009 10:30 am
welcome smee,

when the mortgage is charged off and sent to a collection agency, it will be considered as an unsecured debt. as far as i know, it will be included in chapter 7 bankruptcy.
Posted on: 06th Mar, 2009 12:09 am
I have a 80-20 with the same bank, but as different types of loans, the 80 as a conventional mortgage and the 20 as an equity loan.

I recently noticed in my credit report that my 20 has been charged-off.

Under my strenuous financial situation I was planning in doing a deed-in-lieu of foreclosure and getting rid of the condo which as ruined me emotionally. I already tried a short-sale but the bank took so long to approve (2 months) that the buyer walked away.

Well, my question is: If I surrender the property to the bank, what happens to the charge-off. Could this be renegotiated? or am I stock with a collection agency forever?

By the way, I am currently in the foreclosure process.

Thanks
Posted on: 11th Mar, 2009 10:11 am
As your property is already in foreclosure, I doubt whether you would be able to renegotiate your second loan which has been charged off. However, I would suggest you to speak to the second lender and check out your options.
Posted on: 12th Mar, 2009 12:39 am
To the question pertaining to the bk. The bk judge can now look at your
loan and reavaluate it. This just past the house. The banks hate it but it may help you.
Posted on: 15th Mar, 2009 01:29 pm
I owe 64,000 on my loan and my home probably would be sold for $45,000. I know I would have to owe about 15,000 to the bank. Would this be considered a short sale? I lost my job because of this economy. They shut down one of the starbucks where I was for 5 years full time. My fiance is paying all the bills. Because of this would the banks help me out?
Posted on: 18th Mar, 2009 06:10 am
Correction on what I said with my loan of 64,000. I would have to give the bank $20,000. If I sold my home for about 45,000. Is this a short sale and would they take consideration of my situation with the loss of my job. The trailer is on my name only. Although my fiance is paying the bills now.
Posted on: 18th Mar, 2009 06:17 am
If for any reason I did have a short sale and this was on my record until it was paid off. How does this work if I were to apply for an apartment in Florida with that background? Would they reject me ?
Posted on: 18th Mar, 2009 06:21 am
Hi Madeleine!

Welcome to forums!

Yes, it will be considered as a short sale. If a short sale is recorded on your credit report, then you may have to wait for 3 years in order to get a mortgage. You may apply for mortgage prior to this but there are chances that the lender may charge a higher interest rate.

Feel free to ask if you have further queries.

Sussane
Posted on: 18th Mar, 2009 09:30 pm
I am in a similar situation. I fell behind on my 2nd, and tried to pay what I could, but they did not apply the 1800.00 I sent in toward my loan, they put it in a "black hole" until I came up with the entire balance due. I was trying to get a loan modification, and was told it would take 4-6 weeks. Into the 3rd week, I called to check the status, and was informed that my loan was charged-off. We were in the process of filing for bankruptcy, chapter 7, due to 35k pay loss. As far as I am aware, this charged-off loan is still a lien on my home, and cannot be discharged in a chapter 7 bankruptcy. I spoke with the 2nd mortgage collections after the charge off, and worked out a payment arrangement, and she said that there will be 0% interest, and no penalties if I cannot pay. I guess they just want any money they can get at this point.
I am wondering, if I file for chapter 7, does this loan show as late? I know that I can reaffirm this loan, but it must be current.
Also, the bank told me that they would not foreclose, due to the fact that my home has declined in value, and they would probably only collect 10% of what they are owed in a foreclosure, after the 1st is paid.
I am not sure what to do at this point. I meet with my bk lawyer on Monday.
Posted on: 04th Apr, 2009 05:38 am
I am in a similar situation. I fell behind on my 2nd, and tried to pay what I could, but they did not apply the 1800.00 I sent in toward my loan, they put it in a "black hole" until I came up with the entire balance due. I was trying to get a loan modification, and was told it would take 4-6 weeks. Into the 3rd week, I called to check the status, and was informed that my loan was charged-off. We were in the process of filing for bankruptcy, chapter 7, due to 35k pay loss. As far as I am aware, this charged-off loan is still a lien on my home, and cannot be discharged in a chapter 7 bankruptcy. I spoke with the 2nd mortgage collections after the charge off, and worked out a payment arrangement, and she said that there will be 0% interest, and no penalties if I cannot pay. I guess they just want any money they can get at this point.
I am wondering, if I file for chapter 7, does this loan show as late? I know that I can reaffirm this loan, but it must be current.
Also, the bank told me that they would not foreclose, due to the fact that my home has declined in value, and they would probably only collect 10% of what they are owed in a foreclosure, after the 1st is paid.
I am not sure what to do at this point. I meet with my bk lawyer on Monday.
Posted on: 04th Apr, 2009 05:40 am
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