What Is a Charge-Off of a Mortgage?

You still owe your unpaid mortgage debt after a charge-off.
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Financial chaos can strike without warning. One moment you're vacationing in Fiji and the next you're left holding a foreclosure notice. If you can't catch up on your house payments or make alternate payment arrangements with your lender, the lender will seize your home as soon as the foreclosure process is complete. After the foreclosure, your lender has the right to charge off any remaining mortgage debt you owe.

Mortgage Charge-Off

A charge-off occurs when a lender writes off unpaid debt for tax purposes. Not every foreclosure ends in a charge-off. If your property value exceeded the amount you owed your lender, the proceeds from the foreclosure sale may satisfy your outstanding debt. If the reverse is true and you owed more on the loan than the lender can sell the home for, you are still legally responsible for the unpaid balance. If you do not make arrangements to pay the balance, the lender will eventually charge it off and claim the debt as a tax loss.

Liability After Charge-Off

Don't breathe a sigh of relief just because your lender has finally charged off your remaining mortgage debt. A charge-off is merely an accounting term. You're still on the hook for the debt you owe the bank – even after the lender seizes your property. Post-charge-off, the bank can still contact you and attempt to collect. If the lender cannot collect, cannot locate you or simply lacks the time and resources to devote to your account, it may sell the debt to a collection agency after the charge-off.

Credit Damage

A foreclosure can leave your good credit rating in shambles, but a mortgage charge-off following a foreclosure results in even more damage. The foreclosure and subsequent charge-off shows other lenders that you not only failed to keep up with your mortgage payments, you also refused to work with the bank after the foreclosure to resolve your debt. The degree to which a foreclosure and charge-off damage your credit rating will vary, but the higher your credit, the greater the damage you'll sustain. Both a foreclosure and a charge-off will linger on your credit record for up to seven years.

Legal Consequences

A foreclosure is bad. A charge-off following the foreclosure is worse. A lawsuit, however, can be catastrophic for your financial well-being. Unless you live in a state whose laws prohibit lenders from suing you after a foreclosure, your lender – or the collector who purchases your account – has the right to take you to court over your unpaid mortgage balance. If the creditor wins, you could face consequences such as asset seizure, wage garnishment and bank levies.

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