I am not taking a position one way or another. You borrowed the money, even if it was a bad loan, and agreed to pay it back. Maybe the credit union should not have lent you the money many years ago, but it did and now wants to recover its money.
I also cannot say whether the employees of this particular credit union care one way or another. Most credit unions are small. This means only a few people are assigned to handle all bankruptcy or collection cases. This also leads to an employee's zealous advocacy to protect his employer's interests. To be frank, in this day and age of corporate indifference, this is refreshing.
Your problem here is that increasing home values are reducing previously available options. A Chapter 13 bankruptcy does permit you to eliminate junior mortgages/deeds of trust (also referred to as senior or junior liens) as long as the value of your house is worth less than what you owe on the senior lien.
An example would be if at the time of filing the Chapter 13 bankruptcy your home is worth $100,000, and the first mortgage balance is $100,001 or more. In this scenario, you would be able to eliminate all junior mortgages, whether the mortgage is a second, third or so on.
But you cannot eliminate a junior mortgage when the property value is even $1 more than what you owe on the first mortgage. Any value beyond the first mortgage balance means you are unable to eliminate the second lien. You could still eliminate any subsequent liens (third, fourth, etc.) because their value does not exceed the first and second loan balances, just not the second one.
Your credit union probably knows this law and has been monitoring home values. It now feels that while it might not recover the entire mortgage balance, something can be recovered through a foreclosure sale.
You could try to get an appraisal and see whether the value might still be low enough to consider a Chapter 13 and eliminate the junior lien. Just be prepared to get into a fight with the credit union because it, too, can present an appraisal showing that value does exist and that the lien cannot be eliminated.
A better bet might be to try to work out a payment plan with the credit union to start paying it back. While it might not accept your request for a loan modification or repayment plan, it's worth a shot. Hopefully, you are able to reconcile with the credit union and keep your home. Good luck!