If a non-judicial foreclosing lender is requiring deficiency rights, sizeable cash contributions, or a large promissory note in exchange for short sale approval, then you may be better off letting the property go to foreclosure instead of a short sale because California law will automatically bar the lender from pursuing any deficiency judgment following a trustee’s sale.

However, a non-foreclosing lender retaining deficiency rights on a recourse loan is a different matter.  Even if the first position lender forecloses on the property, the second position lender will still have the right to pursue you for any deficiency if the debt was a recourse loan.  Once the short sale or foreclosure is completed, any remaining debt which was secured by the property will be converted into unsecured debt. This means the debt will no longer have any collateral as security (e.g., just like credit card debt). Unsecured debt is worthless to a lender unless they try to secure the debt through a lawsuit. A successful lawsuit will give the lender the right to secure the debt against another asset owned by you. Oftentimes, the lender will simply write off unsecured debts as uncollectable if they believe you have no realistic means of paying it off rather than suing you for a deficiency judgment. Alternatively, they will just harass you with threatening letters and phone calls to get you to pay them. In many instances, unsecured debt can be eliminated through Chapter 7 bankruptcy or settled for a fraction of the amount owed through negotiations with the lender. Our law firm can assist you with resolving unsecured debt.