Avoid a Short Sale Charge Off

The first thing you need to know about a short sale charge off is the bank is not your friend. But that is true for just about every aspect of a short sale. Sometimes, I want to grab people by their shoulders and shake them into understanding that the banks are not on their side. If you’re reading this right now, listen to me, your bank doesn’t care about you. The only thing the bank wants from you is the money you promised to pay.

If you’re about to embark on a short sale with your bank and you have accounts open at that bank, close them. Put your money elsewhere. Because the likelihood is your bank will close those accounts for you. A short sale makes you a bad credit risk. A charge off on the short sale is an even worse credit risk.

Banks charge off loans because they can deem them uncollectable. The time period varies but a charge off typically takes place after 4 to 6 months of missed payments. A charge off affects your credit report is an adverse manner. You might hear a short sale lender such as Green Tree or Citimortgage (One Main Financial) say you must make a payment on your second mortgage, for example, or it will go to charge off. If you can keep the loan from charge off, it is better for your credit report. Not to mention, once the loan goes to charge off, if it leaves the institution, it will most likely be sold to a collection agency.

I know it’s odd that there is a financial market for uncollectable debts. There are profit-making ventures that have figured out a way to monetize charge offs. Like a vulture swooping down to gobble up a decaying carcass.

However, there are drawbacks to a charge off. A collection agency could nix your short sale by demanding a much higher payment than any of the parties in the short sale can pay. If you’re applying for a HAFA short sale, it is possible the new collection agency does not participate in HAFA, and a charge off could disqualify you from HAFA. Not to mention, if a collection agency determines it can make more money by personally pursuing the borrower, it might reject the short sale all together.

I advise my clients to get legal advice because I cannot give them legal advice about a charge off. Logic says one should avoid a charge off, if one can. I’ve closed quite a few short sales in Sacramento in which a second loan has gone to charge off. As long as it stays with the same bank but moves only to another department, the delay in the short sale is generally not astronomical. Fortunately, thanks to California Civil Code 580e, a charge off is no longer considered recourse after a short sale in California, like it used to be. But it still doesn’t look good on your credit report. And it can mess up your short sale.