Charged-Off Second Mortgage After Foreclosure: What It Means and What to Do

If you lost your home to foreclosure and also had a second mortgage on the property, you might have discovered something confusing: Your second mortgage shows up on your credit reports as "charged off." This is an accounting term that means the creditor no longer considers the money you owe as a source of profit. Instead, it counts as a loss. However, that doesn't mean you're off the hook for the debt.

What Does "Charged Off" Mean for a Second Mortgage?

Basically, a "charge off" is a bookkeeping term, but it doesn't affect your obligation to pay the debt. A charged-off loan, unlike forgiven debt, is still considered an obligation you must pay.

For example, say you lost your home when the first mortgage lender foreclosed. When the first mortgage lender completed the foreclosure on your home, the second mortgage was also foreclosed, and that lender lost its security interest (its lien) in the real estate. While the second mortgage lien was eliminated, the debt associated with the second mortgage wasn't. Instead, the loan became unsecured debt. Assuming you had stopped making payments on your second mortgage, your second mortgage lender then determined that the debt was uncollectible and decided to charge it off. A charge-off usually happens between 180 and 240 days from the date of your last payment.

A charge-off means that the lender is writing the debt off their books, but it doesn't mean the lender forfeits the right to collect it. Even though the lender did a charge-off, the debt remains legally valid. A charge-off does not equal debt forgiveness.

What Happens After a Second Mortgage Charge-Off?

After the charge-off, the creditor will typically send or sell the account to a collection agency. It will also impact your credit.

Collections and Lawsuits

Again, if the lender charges off the second mortgage, it will probably send or sell the debt to a debt collector. The collector then tries to collect on the debt and might sue you.

For example, Tommy had a second mortgage on his home, but lost the property to a first mortgage lender's foreclosure. (Tommy hadn't been making payments on either his first or second mortgage.) Following the foreclosure, the second mortgage lender charged off its loan. The lender sold the mortgage debt to a debt collector, who then contacted Tommy for repayment. Tommy didn't make any payments, so the debt collector sued him for the amount he still owes on the second mortgage.

Credit Score Impact

That agency will probably make repeated calls and send letters to you in an attempt to collect the debt. A lender who charges off your account will report it to the credit reporting agencies. Then, the debt shows as "charged off" on your credit reports and will remain there for seven years. A notation that the debt went into collections will also remain on your credit reports for seven years.

Options for Dealing With a Charged-Off Second Mortgage

You have a few different options after a lender charges off a second mortgage and sends it to collections. Your options include the following.

Make the Required Monthly Payments or Pay the Debt in Full

You can make payments on the debt or pay it off in full. Otherwise, the collection agency might sue you for a money judgment.

Don't Pay and Let the Collection Agency Sue You

Another option is to decide not to pay the debt. Unfortunately, you then run the risk that the collection agency will sue you. Ignoring the debt and letting a lawsuit happen generally isn't recommended. If the collection agency wins the lawsuit and gets a money judgment against you, it may typically collect this amount using standard collection methods, like garnishing your wages or levying your bank account.

Of course, if you have nothing the collection agency can get from you, you're "judgment proof." If this financial situation will last for a long time, then it might make sense to do nothing. However, being judgment proof is, in some cases, only a temporary condition. Your financial situation could improve.

So, consider talking to a lawyer before you make this decision. You might have a defense to the suit, like the statute of limitations has run out, or the creditor doesn't have the legal right to sue (called "standing").

Challenging the Debt in Court

Besides a statute of limitations defense or a defense based on standing, you might have another defense if you're sued. A lawyer can help you identify defenses and represent you in the lawsuit.

File for Bankruptcy

Filing for bankruptcy is also an option because bankruptcy can reduce or eliminate this type of debt.

Settling a Charged-Off Second Mortgage

If you can't afford the required monthly payments or come up with enough to pay off the debt, you might be able to negotiate a settlement for an amount less (often much less) than what you actually owe. Some creditors will accept as little as 10%-20% of the remaining balance to settle the debt. However, you might be liable to pay taxes on any forgiven amount.

When to Talk to a Lawyer About a Charged-Off Second Mortgage

If you want to settle a debt resulting from a charged-off second mortgage or are being sued for a second-mortgage debt (especially if the debt is old), consider talking to a debt settlement or foreclosure attorney to learn about your options.