What Happens When a Mortgage Is Charged Off?

A charge off is a common occurrence in a mortgage that a debtor is struggling to pay off. When a borrower stops making monthly payments, the mortgage goes through several stages before it reaches foreclosure or a similar end. One of these steps is the charge-off, a largely financial activity that the lender conducts for its own reasons. While a charge-off may not affect the debtor directly, it does signal an important change in the mortgage.

Claim Against House

First, debtors should note that a charge off is not the same as a discharge, despite how similar the phrases sound. A discharge occurs when the mortgage debt is completely removed, usually by forgiveness by a lender or through an action by a bankruptcy court. The charge off does not remove the mortgage debt; it only puts it into a different classification. The lender still retains a claim against the house, the ability to foreclosure on the property or demand payment in the case of a bankruptcy.

Lender Accounting

Although a charge off does not remove a lien, it does change the way the lending organization sees the mortgage. A charge off means that the lender has put the mortgage amount owed into a losses account. This means the lender thinks the odds are low that the debtor will be able to make any more payments, and the business wants the tax deductions that come from counting losses on tax returns. Lenders typically choose a cut-off date to move the mortgage from an accounts receivable section to a losses account, no less than several months after the borrower has stopped paying the mortgage.

Lender Options

Once the mortgage has been charged off, the lender has a couple different options. Since it still holds the lien, the lender can decide to refer the loan to a collections department, which will continue trying to get payment from the debtor, most likely by pursuing legal avenues such as foreclosure. The lender can also choose to sell the mortgage for a low sum to a third-party collection agency, which can then try to get payments from the debtor or sue to collect on the debt. In this case, the lender no longer holds a lien against the property.

End of the Lien

Debtors who see a lender has charged off the mortgage have several options to help end the debt problem. Short sales, for instance, are a common resolution to the problem. Some lenders may still consider a restructuring to redeem the loan even after a charge off, although this is more rare. Homeowners may also be able to use a deed in lieu of foreclosure or a bankruptcy to help remove the debt entirely.