What happens the 2nd mortgage after foreclosure?

[brianjen13]

We made our last payment to BofA in April. Got our summons this week. BofA waived their right to a deficiency judgment. But we still have a 2nd mortgage with Citi Financial for $15,000. We live in Wisconsin. I'm not finding any particular laws regarding anything for 2nd mortgage and we are a recourse state, anyway. What do 2nd mortgages typically do? We don't want to file BK. But, if they are unwilling to settle, that might be our only choice. We don't have much other debt.

[despritfreya]

Assuming you do not file bk, once the 1st forecloses the 2nd is nothing more than an unsecured loan and can sue you under the terms of the promissory note you signed.

[brianjen13]

But we can wait and see IF they sue before we file bk?

[despritfreya]

Of course you can wait.

[donnaeve]

I don't know what other debt you have, but I personally wouldn't claim bankruptcy over 15K. I have heard of many people settling their seconds, someone on another forum I visit settled a $90K second for $10K! And, settlements can happen after they sue. An attorney can negotiate that for you as well as they can file bk for you. Just my 2 cents. I don't want to see you do anything rash before exploring other options!

[brianjen13]

Thanks. Now that we are actually in the process of foreclosing Citi is more open to discussing settling with us. We don't really have any other debt. =(

[pcn]

Thanks. Now that we are actually in the process of foreclosing Citi is more open to discussing settling with us. We don't really have any other debt. =(

Can you please explain more on how they are more open? Have they made an offer? Accepted an offer from you?

[brianjen13]

No, they haven't made an offer. But when we first started down this path, we listed our house for sale, hoping to get a short sale and also talked to BofA about a DIL but couldn't even discuss the matter because of the 2nd mortgage. So, we called Citi. To ask about a settlement. And the first thing they said was, "We don't do settlements." So, we quit making payments to them. They threatened to take us to court, then they got reeeeally nice, re-mod our loan and we made 1 payment and we got summoned. So, I called them back up, explained it to them, that our house was foreclosing. And now that we are in the actual process they are willing to talk to us about settling. I'm not sure if things have changed that much in the last 5 months or if that's how it usually is. But, again they haven't even said anything beyond that. I'm hopeful because it's more than "We don't do settlements." lol.

[brianjen13]

Haha. They just offered us 75%. Which is around $11,000. Not gonna happen.

[lorrieduke]

I might add that if you settle your debt on the 2nd for any less than the full amount, the amount that was forgiven will be reported to the IRS as income and you can expect to pay taxes on it (just food for thought).

[aquavir]

I might add that if you settle your debt on the 2nd for any less than the full amount, the amount that was forgiven will be reported to the IRS as income and you can expect to pay taxes on it (just food for thought).

Would that also apply after BK discharge? I am in forclosure, but considering a modification, but only if I can get a good settlement on the 2nd. If the debt has been discharged would I have a tax issue if I settle?

[lorrieduke]

When you file BK you are claiming to be insolvent, meaning your debts outweigh your assets. If you have included the house in your bankruptcy and you filed Chapter 7 and it has been discharged then you are no longer responsible for the debt and no you wouldn't have to pay taxes on it because you were insolvent. But I am confused... if the debt has been discharged through your bankruptcy, what is there to settle? It should be a done deal. Why would you want to modify it if you have already had it discharged?? I don't understand.

[aquavir]

The debt is discharged, but the lien is still in force, so, since we haven't paid either of our mortgages since last November, we are in foreclosure. We were initially just going to wait to be booted, but have recently started to look into a modification of the 1st. Between the two loans, taxes and insurance we were paying $2600 a month, which is more than we are willing to pay for housing post-bankruptcy (failure of my dental practice was the straw that broke the camel's back, but we had been living above our means for some time and are trying to change that). Ditech made us send in the initial paperwork for HAMP, for which I knew we wouldn't qualify, but it was a hoop they needed us to jump through; we got rejected last week; now I'm waiting to see if they offer something in-house. I made it clear to them in a letter that we are willing to work something out, but it would be contingent on the 2nd settling for a VERY low (10-20%) payoff; as the 2nd will likely get nothing if the foreclosure goes through, I am optimistic that they will cut us a deal (they sent us an unprompted modification this summer forgiving all 6months missed payments and interest and cutting our rate from 10.5% to 4%). I'm aiming for $2000 housing payment when all is said and done. We'll move if we have to, but moving is a pain and it is hard to find a place that will take the pets...and you aren't building equity, of course that's a gamble anyway these days.

I just wanted to know if the debts have been discharged, does that render the tax issue moot? I guess the value of them settling their stake in the property would be tied to any equity we would gain from that transaction...I don't know.

[donnaeve]

Mortgage debt that is forgiven on a primary residence is exempt from taxes per the Mortgage Debt Forgiveness Act of 2007. You have to amend your 1040 but include a Form 982 for that "income" to be exempted. Your lender will probably send you a 1099-c at some point that states what that forgiven amount is.

[rosetaylor01]

There is an order in which the outstanding mortgages are paid on a home after foreclosure. The second mortgage is paid only if funds after paying the first mortgage and other elements that come first. Real estate taxes in most states, they are paid even before the first mortgage is paid. Some states have requirements for other charges to be paid before the first mortgage.