SCENARIO #3) What if there is more than one loan on my property and the junior loan is recourse?

If there is a Home Owners Association, the dues should be kept current. Here's a visual flowchart of your alternatives. Thanks to SB 931, you will not face a deficiency jugment from the 1st lien.

You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions. After a foreclosure or short sale, your recourse 2nd loan will convert to unsecured debt, similar to credit card debt. You will still owe the full amount of the recourse 2nd loan; it will NOT be eliminated!

This junior lender might pursue a deficiency judgment against you in court. If, in the face of a deficiency judgment for the full amount of the junior loan, you would realistically declare bankruptcy, consider doing this prior to the foreclosure to get a couple more months of rent-free living and increase the likelihood of short sale success. A short sale is an excellent test to find out if bankruptcy is needed or not.

If the junior loan approves the short sale, bankruptcy may not be needed, but ... more.

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