Legal Question in Real Estate Law in California

I don't know without reading the relevant documents, but you might want to visit a bankruptcy attorney right away. In a Chapter 13 bankruptcy your lawyer would submit a reorganization plan that, in many cases, can rewrite the terms of the loan on second homes.

There are two quite different foreclosure processes in California. Probably 99% or more of foreclosures are accomplished by a trustee's sale. This is a stand-alone process, outside of court, and its use cuts off the foreclosing lender's right to obtain a judgment in court and go after other assets of the borrower. The lender's only recourse is to the pledged collateral in the deed of trust.

Much less frequently, a lender will go to court for a so-called judicial foreclosure. The court can be asked for a deficiency judgment - i.e., a judgment allowing the lender to collect anything it is owed by the borrower, including costs, fees, interest and penalties, that isn't obtained from the foreclosure sale. There are statutory limitations on deficiency judgments, including one prohibiting them if the loan involved is "purchase money," i.e., money borrowed to make the purchase of the property, as opposed to a refinancing or cash-out loan.

Generally speaking, in a run-of-the-mill default and foreclosure on someone's second home, the lender typically chooses foreclosure by trustee's sale over the more expensive and time-consuming process of going to court. The borrower's only detriments are loss of the property and a significant drop in credit rating.

In the far less common case of a judicial foreclosure, one or more of the following factors may be the motivation: (1) the loan is not collateralized with an enforceable deed of trust; (2) the lender is an individual or small entity such as a small-business pension trust that can't afford any losses, as opposed to a major financial institution; (3) the borrower has committed loan-application fraud; (4) the borrower is guilty of "waste;" i.e., depleting the collateral by not paying the property taxes, logging off the landscape trees, or not repairing a badly-leaking roof.

If there is a judicial foreclosure and a deficiency judgment, the lender becomes a judgment creditor and can institute collection activity against your assets and income that are not protected from enforcement of judgment by law. This is a pretty complicated area, but generally enforcement against social security income is limited or impossible.

It depends. In order for the bank to go after other assets that you own, the bank has to get a judgment.

The bank can get a judgment against you in one of three ways.

1) They can sue you on the note, and you could fail to raise Code of Civil Procedure section 726, which requires the lender to first exhaust the security.

2) The lender can file a judicial foreclosure action against you. As Mr. Whipple points out, these are rare, but they do happen. I defended one last year.

3) The lender can be junior to some other lender that already foreclosed, causing the junior lender to lose the security. In that situation, subject to some exceptions, they can sue you on the note, directly.

You should talk to an attorney, before letting anything go into foreclosure.