Legal Question in Real Estate Law in California

Yes, your second mortgage lender has the right to pursue you for the unpaid balance - as does the first mortgage lender. You only escape liability if in the short-sale agreement, both lenders agree to accept whatever they receive in the short-sale in full & complete satisfaction of the debt owed to them. They do not regularly agree to accept less-than they are owed in full satisfaction of a debt, and if the agreement does not so state, they have the legal right to come after you. You also need to be aware that if they do accept less-than is owed, you can have a taxable event in the form of forgiveness of debt. Given the level of credit card debt, and the enormous size of the second mortgage, I would strongly suggest that you speak with a bankruptcy attorney immediately - before the sale is concluded. You will also need to speak with a tax professional about the tax implications of a short-sale and/or foreclosure. If clients are in a position to file bankruptcy, I often recommend that a bankruptcy with foreclosure can be a better form of relief than a short-sale. Feel free to contact me as we offer a free initial consultation on bankruptcy matters.

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I'm inclined to agree with Mr. Gibbs, but wouldn't conclude bankruptcy is best without more information about your income and income prospects, value of the home in relation to the debt, and knowing your personal and family circumstances. So, do have an interview with a bankruptcy attorney (or two), and be sure to inquire about whether a Ch. 7 or Ch. 13 would be better, if bankruptcy is indeed your best option. Also, I'm not so sure that forgiveness of debt would be a taxable event for a homeowner under current law - it used to be, but recent legislation modified this harsh rule for some situations.