You mentioned your junior mortgage was charged-off five years ago, and implied it was sold or assigned to a collection agency, which now holds the note. Before I offer an observation of how you can negotiate this debt, let us define a few terms.
Foreclosure is the legal process through which a lender (most typically a mortgage lender) claims an asset from the consumer borrower. Foreclosure is almost always the result of default on payment. An important fact for mortgage payments is that lenders cannot take partial payment on the mortgage monthly payment.
There are two types of foreclosure: judicial and non-judicial foreclosure. A judicial foreclosure means the foreclosure is a court-based process. In states that use a judicial foreclosure process, the mortgage deed or mortgage lien does not have a forced power of sale clause, which means the lender must take the homeowner to court to take possession of the property.
Some states, most notably California, allow the lender to avoid the judicial foreclosure process. Instead, the lender notifies the borrower with a notice of default. Since the loan terms already specify that a sale process kicks off right away (without going through the court system), the lender can start the foreclosure process very quickly. This explanation is simplified and incomplete, but conveys the general processes behind judicial and non-judicial foreclosures.
Here, the junior mortgage was not used as the basis of a foreclosure. Instead, the bank charged-off the account and sold (sometimes called "assigned") the rights to the junior mortgage to a collection agent. The rights are commonly called a "collection account." Typically, collection accounts are sold for pennies on the dollar, although secured debt (such as a second mortgage) may be slightly more.
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 "write-off" or "charge-off" the debt (the two terms are synonymous). Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.
The write-off date has almost nothing to do with the statute of limitations for debts. To learn more about the distinction between these issues, read Charge-Off & Credit Report.
At the write-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.
A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor's employer, file charges with the local sheriff, or say they will park a truck in front of the debtor's house with a sign that reads Bad Debt on it. All of these tactics and many others are illegal under the Fair Debt Collection Practices Act (FDCPA). Start here to learn the rights consumers have in collections under the FDCPA
Debt Collection & the Law
A creditor -- a debt collector that owns a collection account is a creditor -- has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a summons to appear or a summons and complaint. In some jurisdictions, a process server will present the summons personally. In others the sheriff's deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)
The vast majority of collection accounts never appear in court. However, this does not mean your collection account will or will not be the basis of a lawsuit against you. Creditors are remarkably inconsistent about which debts they pursue using legal means, and which they do not.
Consult with an attorney in your state about your rights and liabilities, and whether you qualify for bankruptcy. If you do, take careful notes of what the attorney explains regarding what will happen to the collection account if you file for Chapter 7 or Chapter 13.
Call the collection agent that owns the rights to your collection account. Explain what the attorney told you should you decide to file for Chapter 7 or Chapter 13. Be non-emotional and business-like, and tell them their behavior will dictate your decision: a negotiated settlement or bankruptcy. If the collection agent is stupid or evil, they will tell you to go ahead and file for bankruptcy.
However, if the collection agent is smart and believes that you are willing to file bankruptcy, they will relent and negotiate a settlement. I realize bankruptcy is frightening and pushes emotional buttons in many consumers. You need need to work though that and realize this is a business decision for the collection agent (it is not personal to the people at that company at all), and a simple financial decision for you. In my observations, collection agents work on a weekly and monthly basis, and negotiations may be more fruitful on Fridays instead of Mondays, and at the end of the month instead of the beginning.
Start negotiations at 10 cents on the dollar.
I hope this information helps you Find. Learn & Save.