When you think "second mortgage" replace the words in your mind with "personal loan". That is what you are dealing with at this point. The collateral is gone but the second mortgage didn't get paid so they are left with the promise of payment and nothing to attach it to. Therefore, you will deal with them exactly like you would deal with anyone else you owe money to. You will likely have to deal with the collection agency as the debt is no longer in the hands of the original creditor. You can, however, make a deal with the debt collector - often at a substantial discount - if you can come up with some money.
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In sum, the holder of your "second mortgage" has no "in rem" or real property rights left in the property which acted as collateral for the loan (assuming that it was not the creditor which foreclosed). In all likelihood, the holder of the paper has "in personam" rights against you, meaning that you in essence have a personal loan with them which can likely be collected like any other loan. I say "likely" because you would have your normal defense considerations, such as a statute of limitations. I believe that you should consult counsel. If there has been no payment on the loan for approximately 4-5 years, and no other acknowledgment of the debt, the statute of limitations could soon be running. I would be very careful about "negotiating" with the creditor at this point - they will be seeking your acknowledgment of the debt so as to start the limitations period over again. Most collectors will do this rather aggressively as the loan gets near its limitations date.
As for you credit, it should be removed from your credit seven years after it is no longer collectable or paid or settled. If this is the only negative on your credit history (which it does not appear to be the case) there is not a lot you can do to remove it. Paying the debt will look better to creditors than a full and final default, but you appear to already have a foreclosure on your credit. The marginal damage likely is not that great.
In addition to the explanations given above, you should be aware that the 2nd mortgage holder could file a lawsuit against you for the amounts that they claim are due. If they do, and win in court, they could obtain a judgment and proceed to collect on that judgment. Your first step is to not ignore any debt collection calls, but to notify them in writing that you dispute the debt and request a full accounting, including the current owner of the debt.
This answer is for general information only and does not create an attorney client relationship between Navaro & Associates LLC and any person. You should schedule a consultation with an attorney to discuss the specifics of your legal issues. Our firm offers free consultations up to 1/2 hour.
Bankruptcy may be the only way to resolve this if you can't pay it or settle with the creditor. Good luck!
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