The Law Dictionary

Featuring Black’s Law Dictionary Free Online Legal Dictionary 2nd Ed.

Writing Off or “Charging Off” Your Second Mortgage & Putting it into Bankruptcy

Every expert says the same thing. A “charge off” is the same as a “write off” and is merely an accounting term used in financial processes. The term is used when a financial institution takes an account from a ledger and posts it to that financial company’s “unable to collect” ledger. The lien from the mortgage still exists on the property owner / debtor’s credit report. The monies owed at the time of the “charge off” are still owed. The financial company is simply waiting to decide its next move. It is simply not going to continue trying to collect on a loan that the debtor is unwilling or unable to pay. The fallacy believed by too many debtors is that they no longer owe anything on this “charged off” mortgage. On the contrary, that mortgage company is just standing still, waiting low. The company knows the financial conditions of the debtor and the primary mortgage. The company does not want to foreclose because, as is likely, the primary will get all of the monies from the sale, leaving nothing for this company. So, again, they do not want to force foreclosure. If they get tired of holding this uncollectable debt, they may sell it off to a collection agency. At that point, this original financial institution no longer cares. By law, they have to remove their lien within sixty days or face being sued by the debtor.

If in ignorance and mistaken belief the debtor files for bankruptcy, Chapter 7 will exempt secured loans, which is what mortgages are, from discharge. That means that the debtor will still owe the mortgaged amounts, no relief, unless the debtor abandons the property. State laws can add to Federal bankruptcy law, but cannot supersede it, and, as we all know, state laws differ from state to state. So, a good, knowledgeable lawyer is essential. Some people “reaffirm” a mortgage loan in Chapter 7. Usually, this has no bearing. Secured loans are exempt from discharge, as stated above.

Experts and lawyers direct debtors in this situation into Chapter 13, where the court assigned trustee can negotiate and restructure the debt into something that is likely grudgingly acceptable by debtor and creditors alike. In Chapter 13, secured debt such as mortgage loans are subject to the negotiations to restructure the debt. Such negotiations will likely get the second mortgage lending company something more than what they would have gotten at a foreclosure, but maybe not as much as selling it to a collection agency. It does not matter to the debtor who is trusting to get a result that relieves the burden into something manageable.

One activity that debtors seem to not try is to personally try to reach an agreeable settlement with this second mortgage company. Nothing ventured is nothing gained, as the saying goes. Experts agree to start somewhat low, say at 10 percent of what is owed. If, and when, an agreement is reached, get it in writing. You may want to have a lawyer review the agreement before you sign. Reaching an agreement leaves all bridges intact, in the (unlikely) event that you engage this same company later on.


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