A bank can list your mortgage loan as charged off if you stop making payments. A charge-off is an internal accounting term used to describe a bad debt. However, the charge-off does not end your financial obligation for the mortgage loan. After listing your mortgage as charged off, the lender likely will begin foreclosure proceedings, if it has not already done so.
Ramifications
A charged off mortgage is serious, because it means the mortgage company has given up trying to collect from you. The charge-off permanently closes the account, eliminating possible solutions for avoiding foreclosure. The Bills website reports that if an account is officially charged off, the lender will not consider reopening it. As a result, foreclosure avoidance programs, such as loan modifications and payment plans, would no longer be available to you.
Credit Report
The charge-off is listed on your credit report for seven years, and it includes the amount due at the time of the charge-off. Your credit score drops when the charge-off is posted, making it difficult to be approved -- at least for a while -- for any type of loan at a competitive interest rate. Creditors view a mortgage charge-off as a sign of financial trouble, because the mortgage payment usually is the last bill people stop paying when they are in a crisis.
Foreclosure
The charge-off eventually allows the bank to receive a tax break, because it records your mortgage as a bad debt. However, the foreclosure process can begin as soon as you miss your first payment, with most foreclosures completed within six months. Once your house is foreclosed, it will be sold by the bank, and you could be held responsible for any remaining balance on the mortgage. For example, assume the balance remaining on your mortgage is $150,000 at the time of foreclosure, and the house is sold at auction for $120,000. That leaves a final balance due of $30,000. As of 2010, laws in 30 states allow banks to file lawsuits against former owners to collect any balance remaining after the completion of a foreclosure, according to CNN.
Avoiding a Charge-Off
Several options are available to avoid a charge-off or foreclosure. However, it is important that you communicate with your lender as soon as you begin experiencing financial problems. You should contact the lender even before you start missing payments. Letting the lender know about your problems while your account is current clearly indicates you are handling your problems responsibly. By being notified early in the process, the lender may offer more solutions for your situation, possibly including an option to skip payments for a few months.
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