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Advice if Creditor is Trying to Collect on Forgiven Debt

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Mark Cappel
UpdatedMay 27, 2024

Can a creditor go back on their promise to forgive a debt after a loan modification?

We did a loan modification on the first loan with WAMU and we are paying that ok, we had a second loan with them (WAMU) and at the time of modifying the first they told us and we have all the e-mails communications that the second will be charged off (by the way he was an employee of WAMU until May, 2008). All of the sudden after almost 6 months of the modification on the first loan we started getting phone calls and we got a letter from a collection company intending to collect on the second (we did stop making payment on the second almost 1 year ago). We did not receive an official letter from them regarding charged off at that time and we were expecting a 1099 at the end of the year, because they said they will not intend to collect the debt anymore, what can we do now if they are trying to start collecting the second, we don’t have money to pay for that right now, my husband income has decrease substantially and I just have a part time job. My husband said he intend to fight because he kept all e-mails from the people who negotiated the modification. What can we do I don’t want to go into foreclosure; our house value now is about $260, 0000 and the total in mortgages is $500,000.00, we live in California. We are having a very hard time keeping up with first mortgage payment, essential bills, child support, and health insurance. We will like to keep the house for a very long time and wait until one day we can sell it and pay everything, otherwise we have to file BK and let go of the house. Also how can that affect my credit, loans and credit cards are under my husband name (title of house is under both names and we live in a Community state)

The key issue in determining your liability for this second mortgage is, whether or not the communications between you and Washington Mutual created a binding contract under which WAMU is required to forgive the balance of your second mortgage loan. The strength of your argument will depend on various factors, including your state’s laws, the exact contents of the e-mails and other correspondence with WAMU, and your and the bank’s actions in the months following the negotiations. You should understand that it is not typical for a mortgage lender to simply forgive the balance of a mortgage debt, so unless you have very clear evidence that WAMU forgave this obligation, you may be facing an uphill battle in asserting your position in this matter. I strongly encourage you to consult with an attorney in your area to explain the problems you are experiencing; a qualified attorney should be able to review the correspondence sent by WAMU’s employees and render an opinion as to whether or not the e-mails you received while negotiating the modification of your first mortgage loan created a binding contract between you and the lender. If the attorney feels that an enforceable contract does exist, he should be able to advise you on how to best assert your position. Even if he determines that there is no binding agreement to forgive the second mortgage, he should be able to tell you how to best proceed in resolving this obligation. For a brief introduction to contact law, which should familiarize you with some of the legal concepts applicable to your case, you can visit this link.

In your question, you mention a few times that Washington Mutual stated that it would “charge off” the balance owed on your second mortgage. Frequently, consumers misinterpret statements by their creditors regarding the “charge off” of their debts to mean that creditors are forgiving the money owed on the debts. Unfortunately, the “charge-off” of a debt by a creditor does not mean that the consumer is no longer liable for the obligation; rather, “charge-off” is an accounting term which means that the creditor has moved the debt from its “accounts receivable” books to its “bad debt” ledger. Generally speaking, banks are required to charge-off accounts which have not been paid for approximately six months, a time limit established by federal regulators which changes from time to time. The purpose of the charge-off requirement is to prevent banks from using old, unpaid debts, which are statistically unlikely to be paid, to inflate the future earnings statements used by investors. The charge-off of an account does not mean that the debtor is no longer liable to pay the amount owed.

As I mentioned, an account usually only charged off by a creditor when an account is significantly delinquent; if you were making your second mortgage payments in a timely manner at the time you were negotiating the loan modification terms on your first mortgage, I cannot understand why the creditor would charge-off your second mortgage obligation. To determine the status of this debt and the balance claimed by WAMU, you may want to obtain a copy of your credit report from each of the three major U.S. credit reporting agencies—Equifax, Experian, and TransUnion. You can request a free copy of your credit report from each of these agencies once every twelve months by visiting You may also wish to contact Washington Mutual directly to inquire how its records reflect the status of your second mortgage account. If WAMU states that you still owe money on this account, you should explain the fact that WAMU representatives assured you that the debt would be forgiven; hopefully, WAMU will recall the account from the collection agency and work with you in resolving this alleged balance. However, I would encourage you to consult with an attorney before contacting either the collection agency or WAMU so your attorney can review your position and help bolster your argument. Ideally, you should have your attorney handle all communication with the creditor and the collection agency, as your attorney will be best prepared to argue the legal aspects of your case.

Assuming your attorney advises you that Washington Mutual is contractually obligated to honor its employees’ statements regarding the forgiveness of your second mortgage debt, you will need to decide how to best proceed in trying to force WAMU and its third party collectors to stop collecting on the account. For example, your attorney may advise you to file a lawsuit against WAMU for breach of the contract created during the loan modification negotiations; if you win your case, WAMU would likely be required to close the account and report this information to the credit bureaus. Another option may be to send a cease communication demand to the collection agency, which should stop the phone calls you have been receiving. The latter option would not definitively resolve the debt, but it would be much less difficult than pursuing a lawsuit against the bank. If WAMU ever tried to sue you to enforce the alleged debt, you could defend your position by explaining that WAMU had agreed to forgive this obligation. Hopefully, once your attorney communicates your position to WAMU and notifies the collection agency to stop its collection activity, WAMU will stop trying to pursue you for payment and will remove any derogatory marks from your credit reports.

If your attorney opines that your past communications with the creditor do not represent a binding contract between you and WAMU, he may advise that you are legally liable for the payment of this account. If that is the case, you may wish to work with the creditor to establish an affordable repayment plan or reduced-balance settlement of the debt in order to prevent any further collection action against you. Depending on your overall financial situation, you may also want to consider filing for bankruptcy protection to prevent this creditor, and any other creditors to whom you are indebted, from taking further collection action against you. To read more about the various options available to consumers who are struggling with overwhelming debts, I encourage you to visit the Debt Help page at

Again, I strongly encourage you to consult with an attorney in your state to determine whether or not the creditor is required to forgive this debt, and it if is, what steps you need to take to defend your position. I wish you the best of luck in resolving this dispute with your mortgage lender, and hope that the information I have provide helps you Find. Learn. Save.



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