Question

My home was foreclosed on about a year ago. I stopped making payments on the second mortgage around the same time and I just got a notice that the loan was “charged off.” What does this mean? Is the debt forgiven? What should I do, if anything?

Answer

Your second-mortgage debt has not been canceled or forgiven. A “charge off” is an accounting term that means the creditor no longer considers the money you owe as a source of profit, but rather, counts it as a loss. A charged-off loan (unlike forgiven debt) is still considered an obligation that you must pay.

Understanding Charged-Off Second Mortgages

When the first-mortgage lender foreclosed on your home, the second mortgage was also foreclosed and that lender lost its security interest in the real estate. (Learn more in Nolo’s article  What Happens to Liens and Second Mortgages in Foreclosure?) While the second-mortgage lien was eliminated, the debt associated with the second mortgage was not. Instead, it became unsecured debt.

Then, after you stopped making payments on your second mortgage, your second mortgage lender eventually determined that the debt was uncollectible and decided to charge it off. (This usually occurs between 180 and 240 days from the date of your last payment.) This means that the lender is writing the debt off their books, but it does not mean that it forfeits the right to collect the debt. Even though the lender did a charge off, the debt remains legally valid.

What Happens After a Charge Off?

After the charge off, the creditor will typically place the account into collection. The creditor will either act as its own collector or it will assign (or sell) the debt to a third-party collection agency. No matter which of these entities is acting as the debt collector, it will probably make repeated calls and send letters to you to in an attempt to collect the debt.

Your Options After a Charge Off

There are a few different routes you can take after the lender charges off a second-mortgage and sends it to collection. Your options include:

Make the Required Monthly Payments or Pay the Debt in Full

You will have to make payments on the debt or pay it off in full; otherwise, the collection agency can sue you personally to recover the money (so long as the statute of limitations has not run out). (Learn more in Nolo’s  Statute of Limitations & Debt Collection  area).

Don’t Pay and Let the Collection Agency Sue You

This is generally not recommended. If the collection agency wins the lawsuit and gets a money judgment against you, it may collect this amount by doing such things as garnishing your wages or levying your bank account. (Learn about  methods that creditors can use to collect judgments.) Also, your credit will be further damaged. Of course, if you have nothing that the collection agency can get from you, and this financial situation will last for a long time, then it might make sense to do nothing. (See  What Does Judgment Proof Mean?)

File for Bankruptcy

Filing for bankruptcy is an option as well since a bankruptcy can reduce or eliminate this type of debt. (For more articles on bankruptcy, including bankruptcy basics, bankruptcy procedures, and specific information about filing bankruptcy in your state, visit our  Bankruptcy  topic area.)

Settle the Debt

If you can’t afford the required monthly payments or come up with enough to pay off the total amount of the debt, you can 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. (To learn more about settling a debt, visit Nolo’s  Debt Settlement & Negotiating With Creditors  area.)

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