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Second Mortgage in Charge-Off Status

Second Mortgage in Charge-Off Status
Betsalel Cohen
UpdatedNov 27, 2023
Key Takeaways:
  • If you default on your second mortgage, the mortgagee can foreclose.
  • Try to work out a forbearance plan.
  • offers additional information for people in default on their second.

What are the ramifications of a second mortgage in charge off status?

My husband is unemployed and we have fallen behind on our first and second mortgage. We have a plan setup that should take care of the first mortgage, but our second mortgage is in charge-off status. My question is would it be okay to let it get charged-off? What are the ramifications of this?

Before addressing the central issues in your question, let us define charge off.

What is a Charge Off

Charge-off (sometimes called write-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 the last payment. The fact an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings. I explain more about the ramifications of a second mortgage in charge-off status in just a moment.

A charged-off account does not mean:

  • The debt is canceled
  • The debt is forgiven
  • The creditor forfeits a right to collect the debt

The creditor may move a charged-off account to its own internal collections department, or sell the debt to a third-party collection agency.

Second Mortgage Foreclosure

Home loan lenders have the right to foreclose if you fail to make your payments for any mortgage. The fact a second mortgage is in a junior position to the first mortgage does not prevent the second mortgage lender from foreclosing.

Try to work out some sort of a payment arrangement with your lender for the second mortgage to avoid a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, a good rule of thumb is the bank can proceed with the foreclosure process if mortgage payments are not received within 150 days. See the Foreclosure Rules resource to learn the specific rules for your state.

If a foreclosure occurs, the second mortgage is paid after the first mortgage is repaid in full. If the sale price is less than the value of the mortgages held against it, then in most states you will owe a deficiency balance. The good news is that if a deficiency balance (if it exists and if your lenders pursue collections) is an unsecured debt, you can enroll in a debt settlement program. However, some states outlaw the collection of mortgage deficiency balances. See the Anti-Deficiency resource to learn the rules for your state.

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Here is the good news: Lenders don’t like to foreclose on mortgages. Foreclosures are costly, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current. To do so, however, communicate with the lender and be honest about your financial situation. The lender’s willingness to help with current problems will depend heavily on past payment records. If you have made consistent, timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. If you are falling behind in payments or who know you are likely to do so soon, contact your lender right away about meeting to discuss alternative payment arrangements.

Loan Workout Plan

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure. Therefore, it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short-term or long-term, and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting temporary indulgence. Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a repayment plan. This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump-sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Foreclosure, Generally

Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid foreclosure as much at all costs.

For more details about a second mortgage forclosure read the article Understanding Second Mortgage Foreclosure.

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




CCarly H, May, 2023
I had to declare a chapter 7 in 2013. I had a first mortgage, which was modified never reaffirmed which I have continued to pay, now has a balance of $202K. I had a second mortgage written off in Feb 2013 which has a lien and I have not continued to pay, knowing when I sell they have that lien. I recently called to ask if they would settle for a lesser amount to start planning for this and they said they would accept the full written off amount because they have the right to charge me back interest and possibly penalties. I called my old BK attorney firm who said if my loan docs allow that they could possibly do that. This could add $100K to my debt. I had asked them to send me loan docs showing they can do this even in event of BK, they said they would so far I don't have them. Before I try to get another loan to pay them off to avoid that charge, I want to be sure they can actually do this, or in practice somehow I get the feeling they don't actually do this and would rather wait for lower interest rates to take another loan. That may be risky. Is there no statute of limitations on them charging back interest? Also, I still bank with them and that charged off loan just shows at the original balance, never any activity of interest being added for me to be aware of. I have received no statements showing they were adding interest. Doesn't truth in lending require I am aware if they can increase the lien and are adding these costs? The Lender is Rivermark Community Credit Union. My home is now worth between 500-600K
BBetsalel Cohen, Jul, 2023
Since I am not a lawyer, I cannot give you legal advice. Only a lawyer that looks over all of the loan documents and your bankruptcy papers can give an accurate answer.
aanne go, Dec, 2014

Great article. Thanks for the info, it's easy to understand. 

DDianna Delten, Aug, 2019

HAMP loan mod 1st MTG with BOA (took 5 years - thankful). 2nd was with Greenpoint/GMAC, and last payment 7/2010. GMAC Notice of Acceleration 9/2010. GMAC charged off 1/2011. Greenpoint and GMAC are dead and gone (BK). No Statements/correspondence until 2013 from Ocwen noting they were the new service company. No statements or info from OCWEN until June 2016 when I received a letter from NCI (Ocwen's credit collection) with payoff that was ridiculous with fees and interest & without any explanation/debt schedule, and Ocwen charged off 6/2016 (per a letter they sent) . Also, no chain of title on County records - only shows Greenpoint (MERS as nominee) dated 2006, so I really have no idea who legitimately controls/owns the note. Statute of limitations in WA is 6 years however, there is confusing info if the SOL clock starts ticking from the last payment (7/2010) or notice of acceleration (9/2010), or is it 6 years from the maturity date of the loan (7/2021)? Issue: I want to settle. I am tired of this hanging over my head, and the property has significant equity. Issue #2: Ocwen is underhanded, and they have little to no information on the loan so I don't know if I can trust them to start settlement discussions. Issue #3: How can the same loan be charged off twice from different institutions? The only reason I ask, is because the last real "balance" I had on the note was with GMAC's charge off in 2011. Can Ocwen collect interest AFTER GMAC charged it off?

DDaniel Cohen, Aug, 2019

I am sorry that you are caught in such a tangled web.

I am not a lawyer, so please take my response as my opinion, but do not consider it legal advice.

Since both the date of acceleration and the date of last payment are beyond 6 years, it appears the SOL has past. The maturity date is irrelevant.

If a written settlement agreement is structured properly, it is binding and doesn't allow for an underhanded player to subvert it.

Charge-off is an accounting term that takes place after a number of months of default. It is possible for more than one lender to charge-off the same account, but usually that would require getting the loan back into good standing. Regardless the effect of two charge-offs is not a key issue. Charge-off doesn't prevent interest from accruing.

If, as it appears, the SOL has passed, you have stronger negotiating leverage, though the lender can stick to the lien on the property and wait for you to sell. One thing to research further is what can restart the clock on the SOL in your state. In some states, a verbal commitment to pay something  on the debt is enough. 

If the size of the GMAC origingated loan is large, I recommend speaking with a lawyer, at least to get clarity on the SOL and what to avoid so you don't reset the clock.

MMichael Ad, May, 2014
State of NJ - I opened up HELOC (2nd mtg) on primary resedencein 9/2005 for $80k w/HFC. I defaulted & HFC Charged Off HELOC in 7/2009 HFC sent ridiculously low Settlement offers from 2009 - 2013. In early 2013 the Settlement offers increased so I panicked a bit. They gave settlement in writing for 10% ($8k) of total amount due by 7/13/2013 & it would report "Account Settled In Full" & "HFC will issue a Satisfaction of the Lien on your Real Property." I accepted. They were rushing me to pay by 7/13/2013 HOWEVER I missed the deadline. I felt like something was "off." I called HFC weeks later in 8/2013. Now they SAID "We cannot provide you anything in writing BUT we will still HONOR the original Settlement you have in writing."I sent cert funds in 8/2013 for $8k. I was nervous they would not accept anything at all at this point. In 9/2013 I received a letter dated 9/20/13 stating "account paid in full for less than full balance" and there was no Satisfaction on Property.Received 2013 1099-C Debt Descr: Credit LoanCode: FAmt of debt discharged: $71,870 I'm not concerned with the way it reports - due to fall off 6/2014.Questions:* They collected my money after 6 yrs. Is the Statute of Limitations 6 years for a Home Equity (mtg) in NJ? * Does "Settled In Full" vs "Acct paid in full for less than full balance" have anytghing to do with 1099?* Do I have any recourse?* Can I fight to get the Satisfaction of Lien on my Real Property?"HELP
BBill, Jul, 2014
If I understand your facts correctly, you: • Defaulted on a HELOC sometime in 2009 • You accepted a settlement offer in July 2013 • You paid HFC in August 2013, which HFC accepted • As of today, HFC has not released the lien on your property

I presume HFC promised to release the lien and any other claims against you in exchange for $8,000. If so, the deal you and HFC reached is called an accord and satisfaction.

Based on my interpretation of the facts you shared, you have a cause of action against HFC for breach of contract. Consult with a New Jersey lawyer who has mortgage litigation or civil litigation experience. He or she will advise you of your rights.

KKaryn, May, 2014
Well, when our lender (GMAC) that held our 1st and 2nd went backrupt, the first went to Ocwen and we don't know where the 2nd went! We received nothing for 2 years regarding the we are getting foreclosure threats from a lender we never heard of before? Is it legal for the 2nd holder to come after us when they have never communciated or sent us a statement????
BBill, May, 2014
The law calls your argument estoppel — a party who sits on their rights for too long loses them. The trick here is whether a court in your state would find that sitting on the right to collect a mortgage for two years is long enough for an equitable estoppel defense to work for you. I don't know the answer to your question, and your best source for a good answer is to consult with a lawyer in your state who has mortgage litigation experience. This is small but growing specialty in the legal world, so you may have to spend some time searching for an expert. Start with your State Bar Association.