Mortgage Law, Mortgage Modification, and Foreclosure: What's the Deal with my Second Mortgage, Revisited. Part II
OK, so you didn't pay your second mortgage for at least 6 months, you are upside down in your house, and your second mortgage has charged off to become unsecured. What now? Now, the lender on your second has to decide if and how they want to collect on their loan. They generally have four options: 1) Sell the debt to a junk debt buyer; 2) collect on the debt like a credit card; 3) settle the debt for pennies on the dollar; or 4) do nothing.
Selling the debt to a junk debt buyer is rare in my experience, at least for a second mortgage. If they do decide to do this, they would usually sell your loan and many others at the same time to the same place. Then it is up to the junk debt buyer to try and collect on your loan. It is usually harder to judicially enforce a loan that you are not the lender on. The reason is that many times you don't have the original contracts and other evidence that is needed to win a judicial decision.
More likely than any other option is that the lender will collect on the loan like it is a credit card or other unsecured debt. Usually this means hiring a debt collector first. That is when the real harassing phone calls take place. Generally a debt collector gets paid something like 20% - 25% of what they collect. That obviously gives them an incentive to get money from you. That is why they are often so aggressive.
After a while if they are unsuccessful with the Debt Collectors, they may have a law firm try to collect from you. Things get dangerous at this point. Law Firms generally get 33% to 40% of what they collect. They much less incentive to settle the debt with you because they figure they will just sue you, get a judgment, and collect the whole thing including attorneys fees and court costs. If you get a letter from an attorney's office get help immediately.
The best situation you can get in is to be in a position where you can settle your loan debt. Now, most people get in this situation because they are really tight on money. However, I've seen cases where people were offered to settle their second mortgage for 3 cents on the dollar! Now that is unusual; but 20% or less isn't. It would be in your interest to borrow the money from anywhere to get rid of 80% or more of your debt. Call us if you think you may be in this situation.
I didn't call "doing nothing" by your lender the best situation b/c it is rare they will just give up on it. If they do, it is likely because you are what is considered judgment proof. That means that even if they sued you and won, they couldn't collect any money from you. This is the case if you have no assets, no job, and/or your income is exempt. Exempt income is usually stuff like retirement, social security income, child support, etc.
I've found that this whole subject brings up more questions than answers, so please call me if you are in this situation and need some advice.
