What happens when a second mortgage debt is written off?

By: Jessica Bennet
Scenario: Our second mortgage was an original $20,000,00 loan which has now escalated to $35,000,00. The mortgage company I dealt with is going to charge off this month. My husband is disabled and 1 child is disabled. The loan is in my husband's name but the deed is in my name. I understand we will receive a 1099-C form. But what happens to the charge off with a lien on the house. I understand the debt is written off. But how does it affect me and will it come off in 7 years?

Solution: Your lender or mortgage company having written off your second mortgage or declared it as a charge-off, the debt will be considered as uncollectible. This indicates that the unpaid loan balance will be reported as a loss when the lender uses an accounting method for calculation of taxes.

Every year the lender/mortgage company files a Profit and Loss Statement with the Internal Revenue Service. All of the year's bad debts including individual charged-off accounts are added up as an item in the Loss section of the Profit and Loss Statement. But this does not mean that the lender cannot collect the debt from you. Even after declaring a charge-off, the lender may hand over your debt to a collection agency.

Moreover, until and unless the lender issues a 1099-C form, you cannot consider the debt as forgiven. And, even if your lender does not send you the form, he may have sent it to the Internal Revenue Service. Therefore, you should claim the unpaid balance on the second mortgage or the charged-off amount as income on your income tax return in the year the debt has been forgiven.

Once you pay income tax on the forgiven debt, the lender should not come after the unpaid balance again. But the unpaid debt gets reflected on your credit report as a negative item. And, it would take you almost 7 years to remove a charge-off from the report. This affects your chances of qualifying for loans at reasonable rates of interest.

However, you can pay off the second mortgage balance in full and update the charge-off as “Paid Charge-off" on your credit report. Or else, you can make a partial payment towards the unpaid debt. This would get reflected on your report as a “Settled Charge-off". Until and unless the charge-off is paid or settled, you cannot remove the lien on your home. So, even if the loan is in your husband's name, you can pay it off to remove the charge-off and get clear title to the property.

Once you have settled the charge-off after paying taxes on the forgiven debt, you can file an amended return with a written proof of the settled debt. This will help you to get back a part or the entire taxes paid on the settled debt. But there is a statute of limitation which allows you to claim the refund on such taxes within a period of 3 years of claiming the cancelled debt as income.



About The Author:
Author's Bio:
Jessica Bennet is a regular writer of financial concepts and her contributions are featured in various financial websites. She is associated with MortgageFit.Com and her ideas and insights on financial issues are indeed valuable for the community.