Legal Question in Real Estate Law in California

Chapter 13 bankruptcy proceedings can reduce ("cram down") the amount you owe on the 2nd to FMV, so your 2nd would be $150K and the payments on the 2nd would be reduced by 75% or so. And when you file, it will automatically and instantly stop the foreclosure. Also, your recent refi documents should be looked at by an expert to see if the loan complied with the Truth in Lending Act (TILA), if not, you could get most of your interest payments returned to you. Watch out for legal time limits as far as filing a TILA lawsuit. Also watch out for bottom feeders and scams.

Stone is completely wrong about you being able to "cram down" or "strip" the second. Partial stripping or "cram down" orders that reduce the debt to the amount of security available in the property only apply to personal property, most commonly motor vehicles. It is not available for real property. As for a complete strip, the only time you can strip a lien from real property is when it is entirely unsecured. If your house was worth $750k with an $800k first, you could file Chapter 13 and strip the second, because it would be entirely unsecured. In your case, however, there is some security for the second, and therefore it cannot be stripped.

Whomever told you about the One Form of Action rule, however, is entirely correct. When a lender forecloses through a trustee's sale, rather than a judicial foreclosure, they are prohibited from then seeking to recover any deficiency, regardless of whether the loan was puchase money or not. So if your choices are short-sale with deficiency reserved, or trustee's sale, letting the property go to trustee's sale is far safer. One other thing you need to be aware of, however, is if the second either goes to a trustee's sale or if you can get them to agree to a short sale with a release of deficiency rights, the lender will issue you a 1099-misc reporting the written off balance of the loan as income to you. That is going to have tax consequenses you should be prepared for.

On last thought on all this for you: lenders are being stupid about short sales and deficiencies these days. They are highly unlikely to recoupe more dollars net of costs by foreclosing and then having to sell the property, than by taking whatever they can get when you sell it on the open market. If you can educate them about the relative numbers of your short sale versus you letting them have the house at a trustee's sale, you MAY be able to get them to take a short sale with a release of the deficiency. It would be a win-win, because they would get more net dollars, and you would get less of a tax hit. If you would like my assistance in trying to get the lender to understand this, please give my office a call.

It's a 1099-C, not 1099-MISC, and through 2012 there is legislated relief from taxability on forgiven debt on a principal residence under the Mortgage Forgiveness Debt Relief Act. Ask the IRS or peruse their Web site for details.

All "foreclosures" by trustee's sale are ineligible for deficiency judgments.

Occasionally, lenders can circumvent the anti-deficiency provisions of California law by bringing suit on another grond, such as waste or loan-application fraud.