Legal Question in Real Estate Law in California

This is a confusing area for many people whose homes are lost to foreclosure. This is because lending, accounting and tax law, on the one hand, and real estate and secured lending law on the other, do not coincide. Because of that, you have no right to have it removed and it will be virtually impossible to do so until it drops off due to aging of the credit reports.

The reason for this is that the borrower protections built into California's (and many other states') as well as federal secured lending laws prohibit collecting unpaid balances following foreclosures in many circumstances. As a matter of lending, accounting and tax law, however, you still owe the money. It is just illegal to take any steps to collect it.

In fact, you also still owe a debt after it is charged off too, whether it is legally collectible or not. This is because writing off a debt is an accounting and tax matter, not a cancellation of the debt. "Writing off" or "Charged off" simply means the lender has followed Generally Accepted Accounting Principals and the Internal Revenue Code to transfer the debt from it's "receivables," which are assets, to it's "losses," which are tax deductible expenses.

This comes as a BIG surprise to many credit card debtors when the credit card issuer informs them their balance has been "written off" and then they start getting calls from collection agencies. This is because the bank can still collect the debt, or even sell it to a bottom-feeding collection agency, after writing it off; they just have to show anything they collect as new taxable income, instead of reducing the balance of an asset which is not taxed.

All of which is a long explanation for the simple rule that an unpaid debt is an unpaid debt, for credit purposes, regardless of whether it is legally collectible. And a written off debt is still a debt for credit reporting purposes, because writing it off is just an accounting exercise to take a tax deduction; it is not a cancellation of the debt.

I agree with Mr. McCormick, and I would add that there is one way to get this unpaid indebtedness of your credit report before it disappears due to age. That is to pay it. Also, just because one bank employee tells you they aren't currently trying to collect the $8,900 doesn't mean they never will -- another bank department may be getting ready to do that at this very moment. (Somewhat unlikely, given the small amount and all the other items they're trying to collect, but not impossible.) Finally, I should point out that if this were a purchase-money second on an owner-occupied house, the bank can't sue for a deficiency, per Code of Civil Procedure section 580b, which you may want to look up and read.