Of late, I came across a query in the forums, where a husband sought suggestions from community members regarding collection of a second mortgage debt. His wife took this mortgage before their marriage, solely in her name. After her property was foreclosed, she was sent a 1099-A form and she thought the lender had canceled the debt. But she was surprised when she came to know 2 years later that the ‘canceled debt’ has actually been sent to collections!
Her husband asked a few queries, which are as follows:
(1) Can the second mortgage company send the debt to a collection agency 2 years after the property was foreclosed?
(2) Is he or his wife still liable for the second mortgage debt?
(3) Can the collection agency file lawsuit and garnish her wages to recover the debt?
(4) Can they come after his salary as they are now married even though the debt was incurred when she was still single?
It’s not surprising that a borrower’s debt has been sent to collections. Lenders often do that for accounting and other reasons, whenever they feel like they’ll not be able to collect the debt from the borrower. But what surprised our poster is the fact that the lender charged off the debt to the collection agency almost 2 years after they sent his wife a 1099-A form!
1099-A form and cancellation of debt
When someone receives a 1099-A form, it does not necessarily imply his/her debt has been cancelled. Lenders send a 1099-A form whenever they foreclose on a property abandoned by the borrower. It is often confused with a 1099-C form, which is sent to the borrower for cancellation of debt. Based on the information provided in the 1099-C form, the IRS levies taxes on the cancelled debt as they consider it the borrower’s income.
Collection after foreclosure on property
The lender can send the debt to collections even after 24 months have passed since they foreclosed on the property. The Statute of Limitation (SOL), as applicable in the state of Georgia for written contracts is 6 years from the date of last payment. Thus, the lenders can surely come after the wife till the debt account is past 6 years. The poster’s wife is definitely liable for the amount of the second mortgage, but the poster himself is not. He did not sign on the mortgage promissory note which is why he does not have any liability towards the loan in any way. This, I believe, answers the third and the fourth questions as well.
Collection agency can garnish wages
The collection agency can sue his wife, obtain judgment against her and garnish her wages if she fails to pay off the debt she is still responsible for. Though, they cannot come after the husband’s salary or assets for this debt, since he neither borrowed nor co-signed on this loan for his wife. Moreover, the debt was incurred prior to his marriage. So, he cannot be held responsible for it.
Settlement with a collection agency
It is most likely that the collection agency would be ready to do a settlement with the wife and agree on a short payoff. The original lender would never have charged off this debt to the collection agency, had they considered this debt recoverable. They sent it to collections only because they had little hope of recovering this debt. Thus, the wife should now start negotiating with the collection agency and try to settle the debt for an amount less than what is actually owed on it.
To know more on this issue, you can refer to the following page:
http://www.mortgagefit.com/second/collections-deficiency.html