Dear Bankruptcy Adviser,
I bought my second home in 2006. It is my husband’s first home. We are having difficulties paying the mortgage, and our home value has gone down by $120,000. We are thinking to let it go into foreclosure. The home is located in California and the original loan has not been refinanced.

Could the lender require any deficiency payments? What is your advice? How long does the foreclosure process take?
— Viola

Dear Viola,
I wish I could say “walk away or stay and pay” to you, and all would be better. The decision to walk away from your home is one that no one should be deciding for you. That is a decision that only you and your husband can make. 

As an attorney, it is my job to provide all the options available and my client must make the final decision. Usually, the decision is quite obvious. Sometimes, like now, the decision is almost impossible.

You should be protected from any second mortgage liability if you did decide to walk away from the home. In California, homeowners are protected by anti-deficiency legislation when they first purchase a house. The original loan (or loans if you finance a first and second mortgage) is called a purchase money mortgage, or PMM, loan. 

A PMM is a mortgage issued to a borrower by the seller of the home as part of the purchase transaction. This means that the money borrowed from the lender was used only for the purpose of buying the house. This can occur with a “piggyback” loan, aka 80/20 loan, in which you obtain both a first and second mortgage simultaneously.

In basic terms, as long as you have a PMM loan and you live in California, then the lender cannot come after you for any deficiency balance remaining once the house is sold in a foreclosure sale. There is an exception to this, but it happens in less than 1 percent of foreclosures. You ought to consult with a bankruptcy attorney, even if you ultimately decide to file on your own.

The foreclosure process takes between six months and nine months from the first time you miss a payment. The lender will try to contact you via phone calls or letters when you first default on your loan payments.

After a few months of unsuccessful collection attempts, the lender files a public document with the county recorders office called the Notice of Default. This begins the 90-day period in which you must modify your loan, find a new loan or bring your loan current.

If nothing improves during that three-month period, the lender files another public document with the county recorders office calls the Notice of Trustee Sale. This begins the 21-day period up to the sale of the house. Some lenders will work with you up until day 20, but this can be horribly stressful and you cannot be assured that the lender will work with you at that point. The majority of homes are sold after the 21-day period passes.

At this point, you need to decide what is best for you and your family. While there appears to be nothing positive that can come of your situation, it is hoped you will make a decision and be able to move forward.