What does it mean if a 2nd mortgage on real estate is “charged-off”? If you had a Home Equity Line of Credit (or HELOC) on your home or if you had a purchase money 2nd loan that was not paid, some banks will charge-off the debt. This designation can be seen on a credit report as a loan with a charge-off. A charge-off on a mortgage or 2nd mortgage works the same way as when credit card debt or any other debt is charged-off. A charge off is simply an accounting designation which defines the debt as bad debt. It does not mean that the debt cannot be collected upon. We can take a look at a few scenarios as examples.
Let’s say our client John owned a home in Riverside, CA which was purchased in 2005 for $200,000. John took out a 2nd loan on the house for $50,000 as a Home Equity Line of Credit. In 2009, John could not keep up with the house payments and it was foreclosed upon. John is now renting a new home until he saves up enough money for another home. After his foreclosure, he noticed that the 2nd mortgage had been charged-off on his credit report. The first mortgage was satisfied by the proceeds after the property was sold at auction. John did not immediately receive any notice of collections activities for the 2nd mortgage, but the 2nd mortgage is a time bomb waiting for activity.
If the 2nd mortgage was not satisfied by proceeds from the foreclosure sale or trustee sale of the foreclosed home, the 2nd loan or HELOC becomes unsecured debt because John no longer owns the property. The bank which manages the 2nd loan can sell the debt or collect on the debt on their own. Eventually, the bank will sue John in court for the outstanding debt because he is still responsible for the debt that was not satisfied in the foreclosure.
A chapter 7 bankruptcy can eliminate the 2nd loan debt left over from the foreclosure. Since it is unsecured debt, a chapter 7 has the tools necessary to discharge the debt completely. Even though it was designated as charged-off, this designation does not mean that the bank or loan servicing company cannot collect on it. They still have the right to collect on the debt. There is no limit to the amount of debt that can be discharged in a chapter 7 which will allow the full amount of the loan to be eliminated.
Past due HOA debt can also be discharged in a bankruptcy. If a home was foreclosed and the HOA had debt which was not satisfied in the foreclosure, the HOA can pursue the outstanding debt left over previous to the foreclosure. HOA debt is normally secured by the property in the community, but if the property is foreclosed or sold at auction, there is no longer any asset to secure the debt. The past due debt becomes unsecured. In this situation, HOA debt can be discharged in a chapter 7 bankruptcy.
Bankruptcy Law Professionals has attorneys available for Riverside and Orange County. Our Riverside bankruptcy attorneys and Orange County bankruptcy attorneys are ready to talk to you about your situation. We offer FREE consultations with our attorneys. To schedule a consultation, contact us at (855) 257-7671.
