Legal Question in Real Estate Law in California

You need to review the entire situation with an attorney. If you have a single mortgage, and it is purchase money, you may very well be better off with a foreclosure than with a short-sale or deed in lieu. There are a lot of factors to look at, and solid advice is not really possible given the limited facts provided in your post, but understand that anti-deficiency laws do not apply at all in the context of a short-sale or deed-in-lieu. They only apply post-foreclosure, if at all. Do not listen to advice from a real estate agent - they are pushing short-sales right now because they don't get paid if you let your home go to foreclosure. I've fought this point recently with a lot of realtors, and they do not understand the complexities of the anti-deficiency laws; many don't even understand that these laws don't apply in the context of anything but a foreclosure.

As for tax implications, you need to discuss that point with a CPA or Tax Attorney before taking any action. The issues you potentially face are imputed forgiveness of debt income, and also the possibility of a taxable gain upon the disposition of the property. There are exemptions, but as with everything, they depend upon your specific financial situation. Trust me - I've filed a lot of bankruptcies recently for people who did not get sound advice before disposing of a distressed property, and all of it could have been avoided had they obtained proper advice before taking action.

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Mr. Gibbs apparently does not understand the anti-deficiency laws either, because really we don't have laws in California that technically are anti-deficiency laws, though they have that effect. The purchase money anti-deficiency statute is technically a no-recourse law. It does NOT only apply in the case of foreclosure. It applies to the debt itself and limits the lender to recourse to the property only if the debt is not paid. There is also the one form of action rule that applies whether the loan is purchase money or not. This has the effect of anti-deficiency by allowing the lender to trade a trustee's sale (also known as a non-judicial foreclosure) for giving up the right to sue to enforce the debt. The lender by not suing to foreclose in court, choses the non-judicial form of action and cannot thereafter chose the judical action too.

Mr. Gibbs is correct, however, that you lose the protections of those legal principals when you do either a short sale or a deed in lieu, unless you negotiate appropriate releases with the lender.

As for the IRS issue, there is currently temporary legislation in place that provides that the IRS is not to collect on forgiven mortgage debt. Last I heard California was considering but had not yet passed matching legislation. Gibbs is right to check with an accountant about the current law on the tax issues.

A "deed in lieu" means a deed given by a distressed borrower to the lender-creditor, "in lieu" (instead of) the lender doing a foreclosure. It essentially surrenders the collateral to the secured party, which can then do with it whatever it wants, including reselling it in the private marketplace (rather than using a foreclosure courthouse-steps auction), hanging onto it until the market improves, or even (rarely) renting it back to the distressed borrower.

A "short sale" means a sale by a distressed borrower (which, incidentally, will also involve giving a deed) to a third-party buyer (not the lender, but with the lender's approval).

The main difference is in who is the buyer.

It's "principles," not "principals."

Finally, I would add that we see an increasing propensity for lenders to insert clauses into short sale agreements that in effect say that the lender is retaining (or renewing) a right to sue for the deficiency between the short-sale price and the amount due. This is legal in a sense, but is contrary to the basic principle of a short sale, i.e., that the bank accepts the "short" pay-off in full satisfaction of the borrower's obligation. This might creep into a deed in lieu agreement as well. So, my advice is to get written assurance from the lender that your short sale or deed in lieu transaction satisfies and closes out your obligations to the lender in all respects.

I agree with Mr. Whipple. As of yet, I am not aware of any published case that has held that Code of Civil Procedure section 580, which prohibits a lender or seller from obtaining a deficiency judgment if the loan is purchase money, to apply to a short sale. I could certainly make that argument based on an extension of precedent, and predict that an appellate court would hold that way.

Other than Mr. McCormick's misspelling, he is also wrong to confuse the one action rule with the prohibition against deficiency judgments after a nonjudicial trustee's foreclosure sale. The one action rule is set forth by Code of Civil Procedure section 726, and does not per se prohibit a deficiency judgment. The prohibition against a deficiency judgment after a trustee's sale is contained in Code of Civil Procedure section 580d.