Letting Your Second Mortgage "Charge Off"
Hi Readers! Here at SJ Mobley & Associates we end up with a lot of questions from confused clients regarding charge offs of their second mortgage. Let me give you an example of what I'm talking about. Let's say you have two mortgages; the first is for $300,000 and the second is for $50,000. For simplicity let's say you bought your house two years ago and the house was worth $400,000. Thus two years ago you would have had $50,000 worth of equity in your home.
Let's jump forward to today. Now, in this housing market, your home has dropped in value and is only worth $250,000 (a very realistic situation for too many people). You now have no equity in your home. Now, finally let's say you can't afford to pay both your first and second mortgage. We offer solutions for lowering payments on both; but sometimes people get into a situation where they have to stop paying their second mortgage entirely.
This is a situation where your second mortgage would charge off as bad debt and become unsecured debt. The reason is that there is no equity in the home to foreclose on. Two years ago, in this situation, the holder of your second may have decided buy out the first mortgage and sell the home to recoup their $50,000. Now, that doesn't make financial sense. So in this situation, if you don't pay your second for at least 6 months, it will charge off as bad debt; but what does that mean?
That means the holder of your second makes an accounting entry and "writes off" the $50,000 you owe them as a loss. However, they will continue to collect on this debt. Usually they send it to debt collectors who will harass you for months. Eventually, if you are employed, they are likely to send the debt to a law firm to sue on, for collection.
So what have you done by letting it charge off? Most likely you have just bought some time. If you are judgment proof (no assets and either no job or living off retirement) then you have essentially rid yourself of this debt. If you are not judgment proof, like most of us, then this is not a good route to take. If you are in a situation where you can't afford your mortgage; but want to stay in your house, you need to get help. We consult for free everyday. The best options for most people include Mortgage Modification, Bankruptcy, and debt settlement. Call us for ideas on all three 303-488-3405.
