ONE of the questions I’m often asked during client consultations is: “What does it mean when the lender says that my 2nd mortgage has been charged off?” Apparently, this has caused a lot of confusion among homeowners and most people do not understand what it means and/or its legal implications.
First of all, let me make one thing clear: When a second mortgage becomes a “charge off”, this does not mean that you no longer owe the debt. Neither does it mean that the status and the terms of the loan have changed in any way. A “charge off” simply means that the lender has decided that the debt is uncollectible and as such has declared it as a loss on its financial report. However, in order to recoup its losses, the lender often sends the account to a collection agency who will now try to collect the debt from you from that point on.
These days, second mortgage holders have very limited options in protecting their legal interest because most properties have no equity. Since a second mortgage loan is subordinate to the first mortgage you have on your property (that means that your first mortgage has what is called a “senior lien” on your property), the second mortgage holder cannot foreclose on your property without purchasing the first mortgage. As I said, because a lot of properties these days are way “upside down”, it doesn’t make sense for the second mortgage holder to foreclose on these properties.
I have seen a lot of situations where people have not made their second mortgage payments for a long time, sometimes for as long as 1-2 years, with no legal action taken by the second mortgage holder. Usually these are situations where the homeowner has just gone through a lengthy loan modification process with the first mortgage holder with no payments going to the second mortgage holder while the loan modification application was pending. Eventually, for those whose loan modification with the first mortgage is approved after a long wait, the next problem to tackle is the second mortgage payment that is now in default or “charge off status”. Most people don’t know what to do.
The trend that I am seeing these days with the “charged off” second mortgages is that more and more lenders are becoming open to a significantly reduced settlement, sometimes for cash, and in some cases, a short term repayment plan while still significantly reducing the debt by as much as 60%, if not more. This is especially true in those situations where the collection agency pursuing the debt now owns the account which they have purchased from the original lender for a small fraction of the amount owed.
Once the second mortgage debt is settled, the lender will release its lien on the property. Any debt forgiven can be considered taxable income by the IRS but in our current economy where a lot of homeowners are insolvent, the cancelled debt will most likely qualify for tax-free treatment under the IRS insolvency exclusion rules. Your accountant or tax preparer can help you understand how these rules may apply to you should your second mortgage debt be legally forgiven partially or in its entirety.
In some cases, you can also file a Chapter 13 bankruptcy in order to “strip off” the second mortgage on your property that is “upside down”. The court will need evidence of the property value and if a “lien strip” is allowed, you can either significantly reduce the amount you owe on the second mortgage or pay nothing at all towards the debt. Getting rid of a second mortgage in Chapter 13 can be an effective strategy for many homeowners looking for ways to make their house payments more affordable.
If you are in debt and think debt settlement or filing bankruptcy may be a solution for you, we are here to help you figure out your best option. For a free consultation, call my office at Toll-Free 1-866-477-7772 and we will help you step by step in finding a solution that’s right for you.
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None of the information herein is intended to give legal advice for any specific situation. Atty. Ray Bulaon has successfully helped over 4,000 clients in getting out of debt. For a free attorney evaluation of your situation, please call Ray Bulaon Law Offices at TOLL FREE 1-866-477-7772.
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