Legal Question in Real Estate Law in California

If they foreclose by a trustee's sale, sometimes also called non-judicial foreclosure, they are barred by the one form of action rule from pursuing you for the balance. If they file a foreclosure lawsuit, then they can collect any shortfall after the foreclosure sale from you personally. There is no tax form that has anything to do with insolvency or avoiding payment. You would have to file bankruptcy.

Mr. McCormick reaches the right conclusion, but for the wrong reason. The "one form of action rule" is Code of Civil Procedure section 726 and has the effect of requiring a lender who wants to recover a possible deficiency to combine the claim for the deficiency into its (in-court) suit for foreclosure. A trustee's sale is not a "form of action" and does not implicate CCP 726. Instead, another section of the CCP, section 580d, expressly provides that a lender which exercises the power of sale in a mortgage or deed of trust cannot recover a deficiency.

Most lenders are going the trustee sale route, rather than going to court to foreclose and also pursue a deficiency judgment, for a combination of reasons. These include the fact that a trustee sale is faster and cheaper, there is no lengthy redemption period to wait out, and deficiency judgments are often hard to collect. In addition, some loans are not subject to deficiency judgments anyway, because of other borrower-protecting laws. These include purchase-money loans from the seller and, in the case of owner-occupied homes, purchase-money loans made by third-party lenders.

We are finding that a lender's election to go to court to foreclose and get a deficiency judgment in the same action, rather than use a trustee's sale, may be more likely if any of the following conditions exist: (1) the borrower has lots of other assets or income; (2) the borrower may have committed loan-application fraud; (3) the borrower is not taking good care of the property serving as collateral; and/or (4) the lender is a small institution, private individual, investment partnership, etc., that cannot afford to take a hit.

Mr. Whipple is correct. The one action rule is only implicated when the lender sues on the note, without foreclosing. If the lender forecloses first, via a nonjudicial foreclosure sale, then the lender is precluded from obtaining a deficiency judgment against you for the remaining balance pursuant to Code of Civil Procedure section 580d.

If the lender sues you to foreclose, however, they are not precluded from obtaining a deficiency judgment unless you could prove that your mortgage was a purchase money mortgage, which based on the limited facts you have provided (plus the fact that you call it your rental property) would appear that it is not a purchase money mortgage.