Old Second Mortgages – How Can I Owe It If It Was “Charged Off”?
Old second mortgages are coming up a lot lately in calls to my law office. I am Orange County bankruptcy attorney, Michael D. Franco. I’ve spoken to numerous people recently about old second mortgages they thought were gone, only to get an unpleasant surprise – the “forgotten” second mortgage was bought by a debt collector and they are now demanding payment of the principal AND years of interest. The homeowners are shocked that the “old second mortgage” – which they ignored when the second mortgage was “underwater” with no equity to attach to – now is “in the money” after years of increasing real estate values.
I Thought Old Second Mortgages Were Discharged in Chapter 7 Bankruptcy
I also receive calls from panicky homeowners who filed a past chapter 7 bankruptcy and thought that the second mortgage was “taken care of” in the prior chapter 7 bankruptcy. The general rule in Bankruptcy is that liens survive bankruptcy unless affirmatively avoided. (Legalese: presupposing the lien validly attached to the subject security – as in the case of second mortgage, a person’s real property.)
There are circumstances where the second mortgage was not properly transferred – so a real estate attorney review of the transfer is vital to investigate any potential claims under applicable law to challenge a transfer of the second mortgage to the new creditor.
What to do When Dealing with a Forgotten Second Mortgage?
First, gather all information available including but not limited to any mortgage statements you may have. Contact a real estate attorney to discuss your options. If the property had been in bankruptcy consult a bankruptcy attorney. Do not make any assumptions about the second mortgage going away. The reality is someone is claiming the second mortgage and wants to be paid. Don’t procrastinate. Seek appropriate legal counsel.
If Your Lender Charged Off Your Second Mortgage, You Still Owe the Debt
Upshot – Your second-mortgage debt has not been canceled or forgiven. A “charge off” is an accounting term that means the creditor no longer considers the money you owe them as a source of profit, but instead, for accounting and tax reasons, counts that loan as a loss on their books. A charged-off loan (unlike forgiven debt) is still considered an obligation that you must pay.
There are aggressive debt collection companies that specialize in purchasing ‘charged-off’ loans for pennies on the dollar. These companies often “sit on then loan” (like a snake in the weeds) until local property values increase to where your cash equity in your property is as equal to or greater than the value of the 2nd loan. When real estate values increase to where you are no longer ‘under water’ but have equity, these debt collection companies know it, want it, and can get at it.
Loan-purchasing firms often surprise homeowners. They are a REAL threat to your home and lifestyle. Often, these debt collection companies will demand that you must pay the old second mortgage in full, or face foreclose of your home. The original loan with years of interest attached to it will be a shocking number.
Demand the total loan amount? Unfortunately, for those surprised with this new threat to their home ownership, the contractural terms of many old second mortgages have 5, 10 or 15-year caps whereupon the ENTIRE second mortgage loan becomes due and payable in full. Other clauses might state that if the payments are not made on time, the loan becomes due in full.
DISCLAIMER: This discussion is for information purposes only and does not constitute legal advice. No article should replace consulting with an attorney to discuss your specific situation. Use of this website and reading this article does not create an attorney-client relationship with Law Office of Michael Franco.