Legal Question in Real Estate Law in California

I'm assuming that since the short sale seems to have closed that by "did not 'release' the debt" you mean the underlying debt, not the deed of trust. I'm not sure how you could have closed the sale if they did not release the deed of trust, so I assume that was done. Therefore, if the debt was a purchase money loan, meaning it was used entirely to buy the house, they have no recourse. They cannot come after you, or if they do they will be breaking the law and you will have a right to stop them under various debt collection statutes. Accordingly you do not need to negotiate anything. You will, however, get a 1099-C next year for the unpaid balance that they will write off. The federal government passed a temporary moritorium on taxing that forgiven balance, but the state currently taxes it as regular income. There is a movement to conform the state tax law to the federal, but in the current budget environment, don't count on it passing.

I think Mr. McCormick is basing his answer on Code of Civil Procedure section 580b, which generally and broadly exempts purchase-money loans from deficiency judgments after a judicial foreclosure. In the most common situation, he is right. Beware, however, that CCP 580b provides protection when the property in question is a one-to-four unit residential structure where the buyers genuinely intended to use one of the units as their primary residence. If this was an investment or income property and the buyer/borrower did not genuinely intend to occupy it, or one of its units, as his/her primary residence, there is exposure to a possible suit for a deficiency. There may be other problems with the generality of the preceding answer as well.