What is a mortgage loan forgiveness? How does it affect my credit?

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I apply to get loan modification for my home loans 1st. and 2nd. both with the same bank…….and after 6-7 months they approve them both. I’m in trial for 3 months…how ever my tax guy told me not to pay the 2nd. loan because I can get a loan forgiveness on that loan ($ 70,000) is this true and legal…. he told me by next year the bank will send me a 10-99 form and it will go as income and I will have to pay taxes on the 70K (approx. $ 7K) better then paying $ 400 per month for the next 40 years……….can that be done…?
I owe 400k on the first loan and 70k on the second loan the hous is worth maybe 300k and I can hardly make the payments on the first one……….. I bought the house for 550k and put 150k as down payment…. it will be nice if it’s true that I can get rid of the second loan even if I pay taxes on that amount. Please any help will be appreciated. Thank you.

6 Comments
  1. Reply
    acermill
    January 21, 2011 at 7:20 pm

    “Foregiveness” is a rather gentle and kind term for what you describe. A lender sometimes will agree to what is called a ‘short sale’ in order to avoid the expenses of a foreclosure. If you do not pay the difference between what you owe and what the lender obtains for the house, you remain liable for this debt, and non-payment will definitely show up on your credit report.

  2. Reply
    the tax lady
    January 21, 2011 at 7:37 pm

    So, do you want the house or not?

    If the 2nd loan forecloses, you won’t have the house *and* will owe the income tax on $ 70,000.

  3. Reply
    Realtoratheart
    January 21, 2011 at 8:33 pm

    Be very careful here. Just understand that when you don’t pay, your credit takes a hit. And they can continue to ding your credit each month, which in turn will impact your whole credit score. When your other creditors get wind, they too will begin to make changes to your credit accounts with them, and in a big way. So you need to know the law’s governing this in your state.

  4. Reply
    Janet P
    January 21, 2011 at 8:50 pm

    Fire your tax guy. What an idiot. He should not be trusted, he is far too stupid.

    No, this is not true at all and will result in a foreclosure with you still owing the 70k after the fact.

  5. Reply
    MATT O
    March 18, 2011 at 7:19 pm

    If you live in a non-recourse state such as CA and your property has diminished so much in value that there is no equity in the home, then the bank will most likely forgive the 2nd loan after a year or so of not paying. It will then be sold to a collection agency to collect the debt, but you are under no legal obligation to pay the loan back. My neighbor did this and it worked for her.

  6. Reply
    Efilenow
    May 13, 2013 at 2:38 pm

    You need to make sure about the type of 2nd mortgage that you have. Some 2nd mortgages, even if issued in a non-recourse state like CA, will give the lender an option to do a judicial foreclosure. If followed, this will open you up to garnishment of your wages to satify the debt. So, be careful!

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