When you default on your second mortgage, lenders will generally charge off a second mortgage anywhere from 120-180 days after your first missed payment. This is an accounting term, that represents the filing of a loss by your lender, but this does not mean that the debt has been forgiven. The second lien is still attached to the property until you pay it off. Once a charge off on a second mortgage takes place, the debt will be sent to a collection agency or another third party to recover the debt.
Charge offs do not represent cancellations of debts; therefore you do not get a 1099-C form for a charge off on your second mortgage.
When you default on a first mortgage, anywhere from 4-12 months or more after you begin missing payments your lender will foreclose on the property. A charge off isn’t a good thing at all, but it provides a chance for you to pay it off if your still paying your first mortgage, or have paid off your first mortgage. To avoid having your account charged off, try working with your lender before hand. If it’s too late, work with the collection agency that your mortgage is transferred over to. A charge off does not mean foreclosure right away, but it could eventually.
A good option for homeowners with a charged off second is to attempt to settle the mortgage for a percentage of what is owed. Some lenders will be willing to accept anywhere from 5-20% of the remaining balance to settle the debt.
Effect on your Credit
A charge off typically takes a significant tole on your credit. This alone can easily bring down your credit score by 50 points or more. It has some of the same effects as foreclosure would have on your credit, as it lasts on your credit report for up to 7 years if it goes unpaid. This is because if you fail to repay your debts far beyond the charge off, you may be enduring the foreclosure process as well. These effects represent that it is better to try and pay off the debt before the charge off occurs, or to pay it off as soon as possible after the account has been charged off. This will help you avoid any further repercussions.
If the property is foreclosed, the collection agency might reserve their right to sue you for the amount still owed on the second mortgage. Another piece of bad news is that anti deficiency laws generally do not apply to second mortgages and/or HELOCs. Lawsuits against second mortgage loans can occur both in recourse and non-recourse states. This is why it’s important to negotiate with the collection agency before you endure foreclosure. Alternative payment plans may be negotiated, depending on the collection agency.
This action is only removed from your credit report when the debt is paid back in full, and it will appear on your credit history for 7 years. You must request to all 3 credit bureaus that the mark be removed from your credit once you’ve paid off the debt, or it has been settled. If you get as far as getting your account charged off, take action immediately as credit is fragile and very difficult to build back up once it has been destroyed.
In 2010, our primary residence (in Florida) had 2 mortgages with Bankof America. The 1st was foreclosed upon but successfully mediated. Loan was modified and we have not missed a payment. The mediation was only regarding the first. The 2nd never went thru the foreclosure process (no posting at the courthouse, served papers, etc).
In Jan 2011 we received a 1099A from BAC on the 2nd. Contact with BAC told us that it was charged off and that no 1099C was going to be issued. My question is tax related: 1st Mgt was 30yr, 138K balance; modified it became $155k/40yr(1yr of missed payments added to total). 1099A says: Prin Bal: $56K; FMV 179K; Y-personally liable.
What is my taxable gain (if any) on this? Also, should I even report it as a loss since FL allow 5 years for the lender to chase me?
Really appreciate any guidance.
Brian(Quote) (Reply)
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