Charged Off - What does it mean?

Question

I have a friend that had someone else managing their money. Several mortgage payments were missed. I guess the bank had someone drive by the house and saw that it’s in terrible shape. They determined that it would cost more than the house was worth to foreclose and charged off the balance of the loan. The lien will remain on the house. The implication I have is that if this friend doesn’t make any payments, the balance owed will not increase because the interest has stopped and the bank will wait to collect on the lien when the house is sold sometime in the future. I have several questions. Any insight?

Will the bank sell the note to someone that buys bad debt? If so, can this company charge interest from the time they buy the note or before?

Since the lien is still in place, I would think that this is not a taxable event to this man. Is this correct?

I’m concerned that he’ll find himself trying to quickly refinance this house at some point in the future when he’s not prepared because the house is being foreclosed on. Some other friends and I are trying to help him make repairs and help him get back on track financially. I was thinking of approaching the bank and attempt to buy the note at a discount. Any advice about approaching the bank?

Dion DePaoli · Answer

Understand as Jon is pointing out that there is a difference between the "Note" and the "Deed of Trust" (or mortgage). They have a relationship to each other but can trade separate from each other. Just because a bank or investor has Charged Off a debt does not mean they sold anything. Charge off's are not always 100%, or in other words a small portion of the debt can be charged off. The debt is charged off when it is deemed noncollectable and has some regulation around the rules if owned by a bank or financial institution. If I charge off debt today, I can still collect on it. The charge off is reduces my capital position in the asset. If I charge the debt off in full and collect on it later in the year, my gain has no cost basis to it as the charge off says I wouldn't collect. In many cases when a bank or investor does charge off the debt, they do sell their note. If a collection company has been involved sometimes they strike a deal with the bank to collect on the note or purchase the note outright. Just because a collection company is involved does not mean the bank is not involved. Not all banks have enough man power to handle the defaults and use third party services to assist. If the DOT has not been extinguished or satisfied by the owner of the DOT/Mortgage it is a valid lien and that lien is enforceable as long as the note is unpaid. An example of how they trade a part, a second position mortgage can be extinguished by the first mortgage foreclose but the debt (note) is still owed. In many cases collection companies by these "unsecured" notes to collect on. Sometimes the bank will co-participate with the collection company by putting the note over to the collection company but still retain partial or full ownership and they share in any collections made or simply pay a fee for the collection service. If you called the bank and they said he can still pay them, then that could be very true. You can ask them about the collection company and see what they say. If you are unsure of the story, you can ask them to prove the ownership of the DOT. DOT/Mortgages are assigned by way of Assignments of Mortgage and those instruments are in public record and recorded. Notes are conveyed through an "Allonge" which grants the interests in the note to the named party. Allonges are not record but are kept in the file at the bank or mortgage servicer or mortgage bailee. This is the legal ownership of the instrument so you should be able to ask for it, although many collectors sitting a call center may not be so informed about the question so think about taking it to the manager. A bank is under tremendous regulation and can not just "keep" money for an asset they do not own. There are mortgage servicing laws that deal with this sort of thing. That being said, accidents do happen so you can just try and work with the bank to get comfortable. If he pays or does not pay, there is no way to know what the bank's intentions are for the note. If they have charged off the note in full and he starts to cure the arrears, they may sell it to get off their books. It is completely up to them on what they want to do with a little influence from regulation on why they need to do things. Since the bank is still involved I would work more with them than the collection company. You can still ask the collection company to prove they have a right to collect on the note by asking them to send you paperwork if you have to. If they can not send it, I wouldn't deal with them. Typically the bank knows who they sold the asset to so you can always call and ask them as well. Anytime you have a forgiveness of debt it is considered an income event and is taxable. So if the bank forgives principal for a satisfaction or though modification there are possible tax liabilities. There are favorable rules in place for primary residences but have him chat with his accountant on the matter as well.

Jamie Hogan · Answer

One of the things I’m worried about is paying off the wrong company to pay off the debt and this man losing his money. He’s very elderly and trusted the wrong person. He’s on social security and a pension which I believe can’t be garnished. So, I was hoping that would give him some leverage. He’s in Texas. Is there some piece of paper that I ask for from the new debt owner that proves they own the debt and can discharge it? What happens if I send them a check and they don’t own the debt? How do I know that I’m dealing with the right person and the debt will be discharged and the lien released once the debt is paid? When I talked to the bank, they said he could continue to make payments. I’m not sure if they were just trying to offset some of their losses and if whatever he pays will actually continue to pay down his loan. If he does, will the bank keep the note and not sell it?

Jamie Hogan · Answer

Thanks everyone. I contacted the bank for him and was able to negotiate an agreement with them. I'm hesitating to post the details here until the deal is totally wrapped up and I have all of the paperwork in hand. Thank you for all of your quick replies. It really helped in the negotiations.

Michael Lauther · Answer

Has anyone contacted the bank to attempt a modification of the mortgage? If the property is in disrepair I would not start to fix it up until the issues with the note are resolved. If the owner qualifies for making homes affordable he could get a 2% 40 year mortgage with up to 30% of principle put on the back end as a balloon requiring no interest or payment unless sold prior to the 40 years. Terms like this can make a modification worthwhile.

Jon Holdman · Answer

In theory there is a mortgage or deed of trust somewhere that has this man as the grantor and the bank as the grantee. That should be recorded with the county where the property is located. When its sold, the transfer should be recorded. In practice, the banks and Fannie and Freddie created the MERS (mortgage electronic registration system) and many mortgages are in MERS. Ask the bank for a copy of the mortgage. Your friend should have one, too. Check county records or have a title company run a title search. If this is a smaller bank, though, they may actually have their name on the note. Is he living in this house? If he's already missed payments his credit is damaged. That may make it difficult to refi.

Abraham McCormick · Answer

The bank most likely does not hold the note anymore if they charged it off, but should be able to direct you to who currently does. In my experience if you play hardball the collection agency should sell the note depending on the agency for 50% or less. Again, I never dealt with a home so it may be different since there is collateral. As a collector even when there was collateral we wanted the money and the most we could get as soon as we could get it. Don't be afraid to give them a low ball offer you never know. Remember with collection agencies you are negociating and if they make you an offer it means they are will to go lower. Ask for a manager if they won't go lower. Don't settle on the first call and always get documentation of the offer tell them to, "Fax me over the offer". The paper sometimes changes hands so fast you will settle with one company and by the time you send the check they no longer have the account. Get documentation after you make the payment. Keep good records because they don't. We had creditors go up the chain, usually a manager can pitch the best deal, but they are usually bigger dicks. Call near the last day of the month they are usually trying to meet monthly goals and some of the best deals are given last day of the month. Make sure to get it done before it goes to legal they are the meanest if they get a judgement they can do some nasty stuff. I don't know if it matters to your friend, but it does make a difference if you pay less than the full amount it will appear on his credit report as a SIF (settled in full) if you don't pay the full amount. As to where it will appear as PIF (paid in full) if you pay the full amount. The most important thing is to get documentation.

Abraham McCormick · Answer

I used to collect. What the charge off means is the bank sold the note. Ma for pennies on the dollar. Many misinterpret this to mean they no longer owe the debt, only to have collection agency a few months or years down the road calling to collect on the debt. They note holder will charge interest and penalties and will start to harass and go as far as suing for the balance owed. I didn't know that did this with property. The largest thing I ever collected on was vehicle.

Joel Owens · Answer

It's really hard to say without knowing all the details. Who owns the note will determine what they want to do with it.If the property is a total loss generally the bank will file an insurance claim on it.Get what they can and write off the rest. Are you sure this property has zero value?? Every property has some value even if not monetary and has a use. Is the land not worth anything?? Even if the house needs to be torn down usually the land has some value to it.