Mortgage Charge-Off & Foreclosure

Should I negotiate with the banks that are foreclosing on the first and second mortgages on my home?

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Bill's Answer: Answered by Mark Cappel

A mortgage is a written pledge of property used as security for the repayment of a loan. The property you purchase is the collateral for the mortgage. If you fail to make payments on the loan, the lender can repossess your home. As a result, the lender has some legal rights on your property as you pay off your mortgage.

Unlike a standard loan, the mortgage is used to enforce the lenders rights to the property if the borrower does not repay the home loan. If the borrower does not keep up with his/her monthly mortgage payments, the borrower can obtain the home through what is called foreclosure.

Foreclosure is the forced sale of a home or property that s pledged as security against a mortgage. The property is sold so the lender can recoup its losses on the loan.

There are two types of foreclosure: judicial and non-judicial foreclosure. A judicial foreclosure basically means that the foreclosure is a court-ordered legal process.

Quick Tip: Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.


I sense you may not fully understand what "charge-off" means. Charge-off is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of your last payment. The fact that an account is charged-off does not mean the debt may not be collected later. Charge-off is not required before a creditor initiates foreclosure. To understand more about the concepts of charge-off and why this term and event means almost nothing to debtors, see the resource Charge-Off & Credit Report.

Quick Tip: Debt distressing you? The Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.


You mentioned your home is "in the final stages of foreclosure." You later ask, "Should I contact them to settle or let it ride for a while?" The time to let things ride for a while is over if your goal is to retain your residence. Negotiate with both lenders now.

Regarding resolving the the second mortgage, see the resource Second Mortgage Foreclosure to learn your options.

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



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Comments (11)

Bremerton, WA  |  March 30, 2014
I paid my last payment of $200 on a 36 month loan of $6000 at 12.01% interest. On occasion I paid the late fee if my payments werent paid by 25th. It was $25 and then $2 a day late fee. I paid all of my payments. He is still charging me 75 dollars every first of the month until I finish paying the late fees which now total over 400 dollars. How can he do this? His records aren't accurate at all. He only shows my payments of $200, doesn't have any dates that they were late, and doesn't include any of the times that I paid late fee on top of payment. I found out that I was paying too much late fee. The promissory note says that a late fee will be charged five days after due date, so instead of me calculating $25.00 on 25th and 2.00 a day after, I should have started that on the 30th. So, that's a good $10.00 he let me keep paying instead of informing me that I was paying too much. How can he show figures if he doesn't even have my payments documented right? I paid my last payment in September 2013 it is now April 2014 and he just keeps adding more and more late charges.
March 30, 2014
It sounds like you keep good records. Start by sending a letter to your creditor that shows all the payments you made. When you provide a clear record of the extra payments you made, there should be no trouble for your lender to credit you (not that there should have been a problem in the first place).

Request that
  1. You only be charged for payments that met the late payment definition that was set out in your agreement.
  2. That the credit reporting agencies receive accurate information about the status of your account.

Your letter should be polite but to the point. It is reasonable to state that if your reasonable requests do not receive timely action that you are going to contact a lawyer to assist you.

Louise M.
Longs, SC  |  August 14, 2011
I do not really understand this. If someone can explain, please reply. I bought a piece of property and paid (never late) on the loan for 3 years. Because of the economy and my husbands work became extremely slow, we had no choice but to "short sell" the property. Now, on my credit report, it shows a foreclosure and it has greatly affected my score. The bank said they reported it as a "charge off" Does anyone know the difference in all of these terms. The bank got paid, but not in full.
August 15, 2011
A foreclosure is a legal process where your lender forces the sale of your home that was used to secure your mortgage. A short sale is an alternative to a foreclosure, where your lender agrees to accept less than is owed and releases all liens on the property.

Are all three credit bureaus showing 'foreclosure'? If your lender agreed to a short sale, it should not be listed as a foreclosure on your report, especially if your short sale took place without your being delinquent on the loan.

Your credit report should show something like "settled as agreed," "account legally paid in full for less than the full balance," or "account settled."

Contact any of the credit bureaus that list 'foreclosure' and dispute the entry. If necessary, provide the bureaus with proof that you sold the house without it ever going into foreclosure.
Judy S.
River Rouge, MI  |  April 19, 2011
We purchased our property in 1999 on a land contract and refinanced twice since then. My name is only on the deed not the loan, loan is in my husband and we live in MI. In Oct 2010 we became 4 mos behind due to the modification and were pending foreclosure. Since then we have heard nothing from them and I decided to call Citigroup just to see what they had to say and the automated system said our balance was paid in full and they no longer service our mortgage. My husband and I decided to call and speak with someone live and I think we let the cat out of the hat. They said "our balance was 0 and why didn't we make any payments"? We explained that we thought they were foreclosing on the house but had not heard anything from them at all. They didn't say they would be foreclosing just transferred us to the recovery dept and afterwards a collections agency call my husband. Will we be able to keep the property since they have done nothing. I think if I wouldn't have called we could have keep our property. Can anyone tell me if the balance was paid or debt cancelled will they come after our home or should we just give it up. It really seem as though it a reason for all this. Is it because my name isn't on the loan and only on the deed and we live in michigan?
April 19, 2011
As your message (and similar messages from other readers) shows, the mortgage servicers are overwhelmed by foreclosures and modification requests, and as a consequence, files like yours fall through the cracks.

Whether you continue your ownership of the property depends on the deal you can reach with the recovery department/collection agent. Do you and your spouse have the income to make house payments?
December 14, 2010
Mike: I am a bit confused by your question about California Civil Code 608 because it discusses jury instructions in a civil trial. You may be thinking of California Civil Code 580b, which concerns California's anti-deficiency rules. Consult with a California attorney who has experience in civil litigation. You may need to file a pleading with a California court asking for a declaratory ruling regarding the status of the HELOC and the collection account on the first deed of trust.
March 10, 2010
Your question is filled with nuance and hints at facts not fully expressed. For example, you said you lived in California, but do not say where you reside now. You do not mention if one or both spouses are on the California deed of trust. Therefore, my first observation is for you to consult with an attorney in your state regarding your questions.

1) What you are asking about is called the deficiency balance or deficiency judgment. Some states including California outlaw collecting deficiency balances on foreclosed property. You do not say whether you resided in the second property -- that is a vital fact to know when considering California's anti-deficiency rules. If you resided in the property then California's anti-deficiency rules may apply. See Is My HELOC a Recourse or Non-Recourse Loan in California? to learn more about California's anti-deficiency rules.

2) If a deficiency judgment is allowed, then it is possible for the judgment-creditor to put a lien on your property, levy your bank accounts, or garnish your wages. See Collections Advice to learn more.

3) The answer to this is very fact-dependent. If your spouse was on the deed of trust for the California property, and the business is a sole proprietorship or partnership, then a lien is possible. However, if your spouse was not on the deed of trust, or if the business is a properly organized, operated, and funded corporation, then it is unlikely the judgment-creditor can place a lien on your spouse's business.

4) A deed in lieu of foreclosure or short sale are excellent alternatives to foreclosure. Talk to your creditor about its requirements for either.
Mike T.
San Jose, CA  |  December 14, 2010
I did a short sale in 2008 on a home that included a 1st and 2nd mortgage. The 2nd mortgage was a HELOC used as a purchase money loan on a primary residence. On the approval document, it stated that the creditor reserved the right to collect on the 2nd loan. Now in 2010, the original creditor have apparently sold the "charged off" debt to a debt collection agency. Also, the HELOC continues to accrue interest. So I have two questions. 1. Since I am in california and the HELOC was a purchase money loan am I protected by the law (particularly civil code 608b)? 2. If (1) is true, how can I settle this debt so the account is terminated? Thanks in advance.
Mike T.
San Jose, CA  |  December 14, 2010
Apologies. You are correct, I meant 580b
Gloria G.
March 10, 2010
We lived in CA and bought a second home in CA in 2005 for $495K; put in $100k down, interest only fixed for 5 years 'til Nov.'10; loan balance is $395K. No equity has been taken. My husband has a limo service business and I'm on my third unemployment extension. We're not in default with both of our mortgages yet. The second house is being rented, but we're still adding to make up the monthly mortgage on it. Money is very tight and business is not doing well right now Questions: If we default on the 2nd house loan and decide to foreclose the house, what will be the tax implication if we decide to do this? 1) Will the bank go after us for the remainder of the loan? 2) Will the bank put a lien on their primary house? We have equity on this primary house. 3)Will the bank put a lien on the limo business? 4) What about short sale -- will this be a better option or deed in lieu of foreclosure the way to go? Your guidance will be very much appreciated. God bless your website. I learned a lot from it just by reading from other people's situations and the advice you've given them.
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