Legal Question in Real Estate Law in California

I think, based on your facts, I'd guess it's around 50% likely that this is a scam, for the reasons you mention. Among other things, compromising a debt has an unpredictible effect on your credit, and the lender or the bill collector is not in any position to know whether it will go up or down; that is up to the credit-scoring agency.

I do not agree with Mr. Whipple. First, you need to clarify what the $106,000 loan is. It sounds, from the discussion of "a larger loan which was charged off and a smaller loan which is in CA." That to me sounds as if you had a first mortgage (the larger loan), and a second mortgage (the smaller loan). If the first mortgage lender foreclosed the property, then he is prohibited from attempting to collect any shortfall from you post-foreclosure. The second mortgage, however, is not wiped out by the foreclosure. The bank lost its security interest in your home when the home was sold at foreclosure, but they still have a promissory note in which you agreed to repay them. Yes, it is legal for them to attempt to collect that debt except in the very rare circumstance that the second mortgage was a "purchase money" mortgage. You'll need to consult with an attorney to determine if that was in fact the case, but second mortgages, post-foreclosure are being sold to debt buyers who are offering settlements right along the lines you discuss in your post, so I would not ignore this as being a scam. You need to fully understand what they are attempting to collect from you, and what rights, if any, you have with respect to the collection of that debt.

As far as the credit issue goes, the foreclosure tanked your credit score, so I would not give that much consideration. Do, however, be aware that if the lender has the legal right to collect $106,000 and you settle it for $25,000 or $11,000, you have a taxable event and could very likely owe taxes on the "foregiven" debt. Consult with a tax advisor also about the impact of settling that debt for less than you owe.

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I disagree with Mr. Gibbs. Foreclosure of a senior trust deed DOES wipe out the lien of the second trust deed holder. The junior may then sue the borrower directly on the note, because there is no security. This is known as the "frozen out junior lienholder rule." That rule does not apply, however, if the same lender held the first and second trust deeds.

I suggest speaking to an attorney competent in this area of law, before agreeing to a bizarre settlement terms. The lawyer can also make the determination of whether or not the second deed of trust would qualify as a "purchase money mortgage."