Legal Question in Real Estate Law in California

Have you considered filing for Chapter 13 and having the court rewrite or eliminate your 2nd?

The only way you can prevent the second lender from pursuing collection of the balance, other than bankruptcy, is if they agree in writing as part of the deal to accept the $5,000 as full payment and write off the rest.

Mr. McCormick is correct, and here's why. A secured lender - which both are right now - must look to the collateral first, and then may perhaps obtain a deficiency judgment if (a) there has been a deficiency because the sale didn't produce enough cash, and (b) there has been a judgment because the foreclosure was handled through the court system, resulting in a judgment. There is the further requirement that none of the antideficiency provisions in our statutes provide a defense.

Your situation is different, because as soon as the property is sold, your second lender loses its collateral through no fault of its own, and becomes an unsecured lender -- also known as a "sold-out junior" lender. Once the second loan becomes unsecured, it is like any other non-real-estate borrowing transaction you might do, not a home mortgage, and the now-unsecured lender can sue without regard to the antideficiency laws.

Bottom line, the second lender can sue immediately and get a judgment against you unless it has agreed that the $5,000 is a compromise settlement.

The second is not a sold out junior lienholder. The second would only be a sold out junior lienholder of the first foreclosed and a trustee's foreclosure sale was conducted. If the second receives $5,000, but is not a party to the short sale deal, the second deed of trust would become a first deed of trust after the first reconveyed, which is what happens during the short sale. The buyer would be then subject to the second as a first, and any financing they obtained would be second to the new "first," unless they signed a subordinating agreement.

The only way to protect yourself is to have the second fully on board, now, and agree to waive any oustanding balance, in writing. They may or may not do this, depending on the amount of the outstanding debt.