I have a home where the credit union who held the 2nd lien wrote off the debt as bad. Afterwards they informed me the debt was "still on their books" and asked if I would agree to pay $600 per month, interest free to pay this debt down. I have been doing so. My questions are these. Since they "wrote off" this debt can they foreclose on the 2nd lien for any reason? Am I correct in assuming that should I decide not to pay them the only way they can retrieve this debt is if I sell my home or the 1st forcloses?
3 Answers from Attorneys
The key to real estate transactions is to get everything in writing. It really doesn't matter whether the credit union wrote off the loan. In fact, the term "wrote off" can mean many things.You need to determine whether the promissory note was cancelled and/or whether the credit union recorded a reconveyance (i.e. cancelling out the original deed of trust). If so, you will have a stronger position to argue that you need not pay. Also, the credit union would not be able to foreclose. On the other hand, if you simply received an oral notice that about the credit union "wrote off" the debt, it is likely that you still owe the money, and the credit union can foreclose.
As Mr. Saltzman notes, writing off a loan (by the lender) is generally nothing more than the lender's internal decision that the loan is more likely than not uncollectable, and therefore should not, with prudence, be reflected on its internal books as an asset. In this sense, writing off a loan has NO effect on its enforceability against the borrower. The lender has the same right to foreclose the day after it writes off the loan that it had the day before. Now, it is also possible that the lender meant something different in its choice of the phrase "write off" and even that it truly no longer intends to pursue collection efforts. However, I'd consider this most unlikely. If the lender still has collateral in the form of a deed of trust, it still may foreclose.
When the loan is a second and the property is under water, however, the lender may elect to hold off and hope that either the holder of the first forecloses or that the value of the property increases.
If the holder of the first forecloses, the holder of the second becomes an unsecured creditor and actually has greater rights, because it can now sue the borrower and collect its judgment from any and all (unprotected) assets of the borrower, instead of being limited to foreclosing on the property covered by its 2nd trust deed.
Or, with property values starting to increase, and if the first is not in default or the first lender elects not to foreclose, the credit union may just wait for better times, then foreclose.
I don't think you even know what a "write off" is: