What Happens when Your 2nd Mortgage Becomes a Charge Off?

A mortgage charge off does not affect the status of your loan. The charge off simply means the lender has decided the debt is "un-collectable." The lender reports it as a loss on its financial report for the quarter. In most cases, the lender will send the account to a collections agency. The agency will be the one handling your loan from this point forward, but you still owe the debt.

Second Mortgage Charge Off

When the mortgage charge-off applies to a second lien on your home, the process and consequences will be different from a default on your primary mortgage. The second loan is subordinate to your primary mortgage and therefore the lender cannot foreclose on your property without buying that first mortgage. The lender will only do this if the value of your first mortgage and second mortgage is smaller than the value of the property. Otherwise, the collections agency who now has your loan will use alternative tactics to attempt to get you to repay. Repeated failure to pay the loan despite contacts from the collections agency will lead toward severe consequences.

Attempts to Collect

You will be notified in writing when your second mortgage is officially listed as a charge off. Then, you will be contacted by a collections agency. This collections agency will likely have legal authority to execute your loan contract and attempt to collect on the debt. As a consumer, you have a right to ask for verification of this authority. Instead of ignoring the collection attempts, submit a written request for verification. While the agency verifies the debt, you will have a period of no collection attempts. This can give you time to work out a plan to make payments.

Payment Plan Arrangement

Once the debt has been verified, you will receive a notice from the collections agency showing their legal right to collect on the debt. In the absence of a guaranty like this, do not make any payments to the agency. Once you know the collections agency owns your loan and is acting to enforce it, do not ignore further contacts. Instead, keep a record of every contact you have with them, and ask to work out a payment plan. Collections agencies receive a portion of your payments on your debt and they may be more willing to work with you.

Threat of Lawsuit

If you are unable to pay the loan, you may face a lawsuit from the collections agency. Again, this organization has nothing to lose by attempting to enforce the contract. Unless your loan contract is unlawful or otherwise void, a judge will assure you pay the debt, even if that means wage garnishment.

Tax Implications

Some or all of your debt may be forgiven if you are truly unable to pay. It is rare for the entire debt to be excused, but it is common for at least a portion of the interest or finance charges to be written-off. Any forgiven debt is a form of income as far as the IRS is concerned.

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