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Friends big HELOC Charged off as bad debt?


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A friend of mine is upside down in his house. (house only worth about 140k). He is current with his first mortgage of 70k. (after a loan modification, it is a freddie mac based loan).

Now the second is a HELOC with a major lender who has recently been bought by Wells Fargo or Chase...he is not sure.

The curious thing is his HELOC is for far more than the primary.

He owes a bit over 250k on it.

He pulled his credit report thru TransUnion this morning and checked.

It says regarding the HELOC... under the pay status line: Charged off as bad debt.

in the remarks line ...it says: >profit and loss writeoff<.

He asked me if I could ask the forum what does that mean, and will he be

looking at getting sued?

Another thing, 1 week ago he got a letter from a Lawfirm stating they are collecting in behalf of the HELOC major lender, and he has 30 days to respond either by calling ther lender or by letter. Funny thing, the ph number they gave in the lawfirms letter was WRONG.

He called the lawyer, and the lawyer said to make an offer of what he can afford in payments etc. My friend responded...would the 'lender' take less than the amount owed and then payments? Lawyer said probably not. And he suggested he call the 'lender'. My friend said the phone number was wrong, the lawyer said ...ok then just go into a local branch and see what they say. The lawyer was very casual and hardly interested, which was surprising because 250k is a lot of money.

Any advice or information on this dilemna? What does this 'Charged off as bad debt thing' mean? Is this WAY too good to be true, or is he in for a rocky road..? Thanks for everything.

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"Charged off" is an income term for the books of the lender. It means nothing to the borrower.

Currently the home has at least a $320,000 lien on it (could be more depending on the terms of the modification). Liens are paid by priority. The first lien is the $70k (at least). The second lien would be $250k. That $250k is growing as the interest remains unpaid and is capitalized.

HELOCS are non-purchase money and are recourse debts. He can be sued personally for the money.

So the lender here likely has a few choices:

(1) Foreclose. Pay the first lienholder his $70k and then pocket the remaining $50k or so after selling fees. May not be ideal because it represents a mere 20% payout for the lender.

(2) Sue the borrower personally for the money. Probably not ideal because a judgment may never be paid. Or a Chapter 7 may be filed.

(3) Contact the borrower and agree to a reduced payout and receive payments again. May be better tha nothing.

Depending on state law, it could be a combo of the three options. For instance, in my state you can foreclose, sell the home, and then sue the borrower personally for any deficiency.

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Hi jq26,

Well after considering your list of 3 alternatives, he is hoping for door #3.

Maybe he can work out something.

It is just too crazy to believe that this can just go away.

It seems to me that they would have let him know something one way or the other.

And it also seems that they are not interested in paying off lender #1 at this point.

BTW, he lives in Florida if that makes any difference.

If he can get the cash together, he needs to consult a good attorney!

Thank you for the information.

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Remember also, just because the loan has been charged off does not remove the lien from the house.

So - if he makes some sort of agreement (for example, pay 10% of the outstanding debt to the CA), he needs to get a lien release too. Otherwise he threw away his money.

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