Legal Question in Real Estate Law in California

It doesn't sound like there is any benefit to you in trying to save this house. If it is your personal residence you can't even do a Chapter 13 Bankruptcy cram-down. According to your question, you owe $436,000 on a property worth $300,000. Why would you want to pay off that much debt for property worth so little? The best thing you can do is let the second foreclose. That and Chapter 7 Bankruptcy are the only ways you can avoid them obtaining a deficiency judgement if they want to. This is because once a lender choses to foreclose without suing and doing the foreclosure through the court, they can't then sue the debtor for any balance. If you took out the first when you bought the property, and it is your residence, you are a little better off there, because all they can do is foreclose as a matter of law. If they do that, however, the second will lose their lien, and will sue on the debt immediately. So, bottom line: if you can keep the first from foreclosing long enough for the second to foreclose, AND the first qualifies as a purchase money loan (taken out when you bought the property, never refinanced, property is your residence), then you will be able to walk away from the all the debt. If anything goes wrong with that picture, or your first doesn't qualify for the purchase money anti-deficiency rule, you really need to talk to a Bankruptcy lawyer.

Respectfully disagree with attorney McCormick. In a chapter 13 the debtor can have the court "cram down" or even "strip off" the second mortgage, and since the court can't modify the terms of your first mortgage you will be left only upside down $33,000. But you might also be able to discharge some other debt, and maybe this would be an option for you. Maybe you could tell the 2nd you are going to file chapter 13 if they don't take $10,000 to settle the loan. Bankruptcy is complicated and you should visit a lawyer.

Taken together, the two previous answers pretty well cover the waterfront. If you have good income, Ch. 13 might be a possibility, but the high negative equity makes this look like the wrong choice. If I were in your position, I'd try to avoid having the 2nd become unsecured, which is more likely to result in a suit from the 2nd) where you don't have anti-deficiency protection, so try to get the 2nd to foreclose first. A full diagnosis of your legal and financial situation and advice for the future calls for planners, lawyers, credit counselors, etc. to advise you on how to avoid these mishaps or protect against their consequences - whether related to job loss, health issues, divorce, the stock market, gambling, etc. Taking out all that cash on the HELOC may have been important or necessary for some reason, but now it is helping put you in a very serious financial predicament.