Foreclosure and Re-Aged Debt

Before discussing your questions, allow me to define a few terms:

Foreclosure and Mortgage

A foreclosure occurs when a debtor fails to repay a secured loan, and the creditor exercises its right to seize the property secured by the loan. A property owner can have one or more mortgages on a property. Senior mortgagees have priority over junior mortgagees. This is called "first in time, first in line," which means that if a first mortgagee forecloses, it can sell the property and use 100% of the proceeds to satisfy its loan. If there is any remainder, this goes to the second mortgagee. After the second mortgage is satisfied, any remainder goes to the third mortgagee, and so on.

Charge-Off

A charge off does not mean the debt is forgiven. When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to charge-off the debt. Charging-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

At the charge-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest.

Re-aging a Debt

When you ask about re-aging a debt, I assume you mean the creditor changing the date of first delinquency. Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. This law is known as the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer’s credit report for 7½ years. The clock starts approximately 180 days after the date of first delinquency on the account. To learn when an account will be removed by the credit reporting agencies (TransUnion, Equifax, and Experian and others), add 7½ years to the date of first delinquency. Subsequent activity, such as resolving the debt, is irrelevant to the seven-year rule. However, if the debt is a tax lien, that can appear for seven years from the date of payment. A bankruptcy will appear for ten years from the date of the final order. Delinquent federal student loans can be reported indefinitely, i.e., for as long as they are delinquent.

Allow me to repeat one sentence in the preceding paragraph: Subsequent activity, such as resolving the debt, is irrelevant to the seven-year rule. This is federal law. It is illegal for a creditor to change the date of first delinquency. In other words, a creditor may not re-age a debt.

Your Questions

Your questions seems to center around two issues: Preserving your credit score and maintaining a strong negotiating position with the second mortgagee. You asked if you should keep the second out of charge-off status or re-age the second mortgage. I see no advantage to you to worry about the date of first delinquency on the second mortgage if you are going into foreclosure on the first mortgage. The damage to your credit score by the first foreclosure will be severe. A second foreclosure will cause credit score damage, but the amount of damage will be relatively small.

I can see one potentially significant liability for you should you continue to pay the second mortgage: the statute of limitations on the debt. With each payment you make, you push out the statute of limitations another month. We see creditors ask a debtor to make a small, "good faith" payment on a debt oftentimes near the time when the statute of limitations on the debt is about to expire. Unwittingly, the debtor resets the statute of limitations the moment they place the payment in the mail. You do not seem to be in this situation, but I want you to be aware of the statute of limitations issue.

Regarding your your negotiating position with the second mortgagee, I see no advantage to your negotiating position by staying current on the second mortgage if your goal is to eventually negotiate a settlement with the second mortgagee. This is not to suggest I am encouraging you to stop paying your second mortgage. Consult with an attorney in your state about your rights and liabilities concerning the deficiency balances.

Regarding the 1099-C, federal law requires banks to issue a 1099-C if the bank cancels a debt that exceeds $600. It is impossible for me to speculate if either creditor will cancel the debt. See the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn if you qualify to write-off the debt should either or both creditor issue a 1099-C.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com