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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

this is true that a chapter 7 bankruptcy will not remove the liens on the property. you will have to pay off the second mortgage to remove the lien. as it has been charged off, it will show on your credit score. however, if you pay it off, it will be reported as a 'paid charge off'. i think you can reaffirm the loan, if you think you would be able to pay it off. you're doing the right thing in consulting with your bankruptcy attorney. do let us know what suggestion he offers you.
Posted on: 08th Apr, 2009 04:09 am
I did meet with my bk lawyer, she didn't offer much help in the way of what to do with my second mortgage. She did say that in most bk cases, that reaffirming real estate isn't necessary. That the bk court will not be concerned with the mortgages, being that we are filing chapter 7. I am still concerned though, from my understanding everything goes into your bankruptcy, and you must reaffirm what you want to keep. My second mortgage will then leave the collections dept. that I made the payment arrangement with, and it will now go into the bankruptcy dept. of my lender. I am hoping at that time I can make the same arrangement of payments with them. I will keep you posted, I am sure this can take time going through the court system.
Posted on: 12th Apr, 2009 03:02 pm
i have a 1st and 2nd mortgage with one bank and a 3rd with another : if i pay the 1 and 2 and don't pay the 3rd , can the 3 forclose on me? or just place a lien on the house?
Posted on: 13th Apr, 2009 05:22 am
hi guest,

i don't know why your bankruptcy attorney said reaffirmation is not necessary. but i believe it is necessary in chapter 7 bankruptcy if you want to keep the property. have you talked with your lender's bankruptcy dept yet?

hi frenchis,

it is most unlikely that your third mortgage holder would foreclose on the property in case of a default. if you keep being current on the first and second, you have the least chance of your property being foreclosed by the third mortgage holder. they can put lien on the property, though.

thanks,

jerry
Posted on: 13th Apr, 2009 05:43 am
do you think they will deal with me on very low persentage return then since they are the 3rd holders
Posted on: 13th Apr, 2009 07:03 am
i thought i would offer then 10 thousand because i have been paying on it for 5 years at 8 percent ; it waS A 70 THOUSAND BUT OUR INCOME HAS BEEN CUT IN HALF
Posted on: 13th Apr, 2009 07:09 am
Hi

What Jerry has said is right. They will, in all probability, not be foreclosing on the property because as a third lender they will not benefit from the foreclosure. If the property is foreclosed, the first and the second mortgages will be paid first and then the third one. With the property value being on the decline, the third lender would be wise enough to understand that they won't be getting much, if at all, from the sale of the house. If there has been a pay cut and your income has been reduced, why don't you arrange a work out plan with the third lender? Have you contacted them regarding this?
Posted on: 13th Apr, 2009 07:37 am
yes, i have thought about offering thrn 10 thousand and thats all i have because i am not going to sell the house
:; i pay the 1st and 2nd to one bank: if the 3rd bank does not except it then i will stop paying all together
Posted on: 13th Apr, 2009 12:15 pm
hi

in that case, you can continue making the payments towards the first and second mortgage and stop paying the third one. they will not foreclose on your property. however, if you stop paying, your credit will be affected.
Posted on: 14th Apr, 2009 03:41 am
How do you go about asking a bank to charge your mortgage off instead of trying to get a short sale?
Posted on: 14th Apr, 2009 04:06 pm
Hi

Banks generally charge your mortgage off when they think that they cannot recover money you owe. It's for the accounting and tax purposes that they show the debt as their loss and charge it off to a collection agency. I think it's completely upto them if they'd charge off your debt. I don't think you can ask them to charge off your debt.
Posted on: 15th Apr, 2009 03:22 am
my second mortgage was charged off and they said it was an unsecured loan. which i do not get, then i found this. Does anyone know how true this is?

mortgagelawnetwork.com/foreclosure-sale-may-not-end-financial-liability
Posted on: 09th May, 2009 07:55 am
Hi

Like first mortgages, the second mortgages, too, are generally secured by the real estate. You've said that your second mortgage isn't secured. But how did you come to know about that? Even if it's unsecured, you are still personally liable to pay off the loan. The second mortgage holder cannot come after your property, but they can still sue you for non-payment of the loan.
Posted on: 11th May, 2009 04:23 am
i sold a home 4-1/2 yrs ago, now the bank says they made a mistake an paid the wrong mortage off and now wants me to pay for a home i sold in 04
Posted on: 28th May, 2009 05:45 pm
Hi gwen,

Was it a primary mortgage or a second mortgage? Did you pay it off after you sold the house? Did the mortgage company give you any release of mortgage document?

Thanks,

Jerry
Posted on: 29th May, 2009 06:47 am
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