What Is A Charge Off And How Can It Affect Processing A Short Sale

When there is a Junior Lien (secondary mortgage) that is delinquent more than 120 -180 days a creditor may choose to charge-off the debt owed. A charge-off is the declaration by a creditor that an amount of debt is unlikely to be collected. In doing so the creditor is able to write off the full amount on their taxes and claim it as a loss. A Charge-Off does hurt your credit and can stay on your credit report for up to 7-10 years.

It’s important to know that it would be rare for a 1st lien to charge off because of their adequate assurance in the value of just the land but who’s to say it’s not possible. When a lien is charged off it is often transferred to a recovery department or given to an outside credit agency who will attempt to collect on the loan. A Junior Lien that is charged off can make processing a short sale more difficult for a few reasons.
1.    DELAYS - If the lien is charged-off mid process, even after the loan was approved, it will have to start from the beginning because of the status change often leading to have to deal with a new department or collection agency.
2.    HIGHER RELEASE AMOUNTS MAY BE REQUIRED – Once at the new department, or altogether new company, there are now intrinsic costs that have to be built in. There are costs just for keeping the lights on and the seats filed. Often higher costs cause much higher releases. For example, a bank who may have accepted 10% as a pay off may outsource it to another company and now require 15% once in recovery.


It is possible to prevent a charge off from occurring. Communication is KEY. In order to prevent a charge off stay on top of how delinquent the debt is. Making a payment to the lender would prevent the lien from being overly delinquent which triggers the charge-off. Charge-off companies can be aggressive and in many cases that could be the difference between a deal getting done and a deal going south.




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Great write up, Brett! 

#2 above is true, especially if collection efforts have advanced to having an attorney/law company involved. I had one where the collection company obtained a judgment and was garnishing wages from the borrower. We ended up raising something like $8k on a $15k balance just for a lien release. They still weren't willing to satisfy the debt. 

If you think about it, they're definitely "holding more cards" when it reaches that stage. 



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