Legal Question in Real Estate Law in California

Re: Foreclosure - assets seized?

If the loans were purchase-money and you are owner-occupants, you are protected from a lender's deficiency judgment that would be a lien on your other assets. In a vast majority of cases, that's the end of the story.

In rare instances, lenders go after defaulting homebuyers who appear to have other assets that could have been sold and used to pay the lender, but weren't, or that could be tapped after the fact, on legal theories that are outside the usual broad protections against deficiency judgments for default on owner-occupied purchase-money loans.

Among the theories that evade the antideficiency laws are (1) loan-application fraud, such as deliberate misrepresentation of income or intent to be an owner-occupant, and (2) waste, e.g., the deliberate or negligent failure to maintain the value of the collateral (the house) as, for example, by not repairing a leaky roof, allowing extensive interior damage; or logging off the landscaping trees and selling them to the sawmill just before the foreclosure.

In a run-of-the-mill situation, folks in your position lose the house and their credit rating, but the legal and financial battering stops there.

Re: Foreclosure - assets seized?

Just to add on to Attorney Whipple's excellent answer, from a tax perspective there is protection at the Federal from having to pay income taxes on what is referred to as "forgiveness of debt" income. The IRS will not come after you for income taxes on the amount of the shortfall. The State of California has a companion bill which has, or is about to pass and become law, so the State Franchise Tax Board also will not be able to hit you with an income tax bill for the deficiency. Attorney Whipple is correct that the odds are in your favor that you will not hear from your lender again post-foreclosure, and the biggest hit you will receive is your credit.

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