A mortgage can be forgiven, discharged by a bankruptcy court or charged off by the lender. These are all different activities, although their differences can be confusing to debtors who are trying to deal with unpaid mortgages, foreclosures and bankruptcies. When a lender charges off the mortgage, this does not mean the debt goes away or that the obligation to offer security for the unpaid debt has been removed. It is a financial step that lenders take when dealing with a mortgage that does not look like it will be paid off.
A charge off is essentially the act of a lender admitting that repayment for the mortgage is unlikely. The lender makes an accounting switch, moving the loan from a debts owed account to an account that totals losses. By counting the mortgage as a loss, the lender can receive a tax reduction for it. This does not remove the lien itself, however, so the lender still has a claim on the borrower and can still pursue repayment. A charge off is common after several months of not receiving payments from the borrower.
If the lender decides to keep the loan after the charge off, it will refer the debt to an internal collections department. It is this department that is in charge of calling the borrower (those calls the borrower dreads) to demand payment and make notifications regarding the foreclosure process. The collections department may file for foreclosure itself or route the loan to a separate foreclosure department in order to seize the house, depending on how the lender has structured its organization.
In other cases, the lender will sell the mortgage to a third-party collections agency. This means that the lender is giving up the lien, but the claim is simply transferred to another organization and does not go away. This debt collections agency then attempts to collect at least enough payments to make a profit on the mortgage, which it purchased for a small sum. It is not as common for third-party agencies to start a foreclosure, although they often have the ability to choose that route through a lawsuit.
Getting Rid of the Lien
Borrowers can choose several ways to get rid of a lien. Fortunately, although a charge off does not get rid of the lien itself, it does make it more likely that a lender will be willing to work out a deal. For instance, the borrower may be able to give up the deed to the house in exchange for removing the mortgage debt. A bankruptcy court may also be able to strip the lien from a second mortgage if the value of the home is low enough.