Legal Question in Real Estate Law in California

Re: rights of the 2nd mortgage company after a forclosure

You understanding is incorrect. If the first lender forecloses, the second would be first in line for any proceeds that exceed the amount owed on the first. To the extent that the second wasn't paid by the sale, they could sue both you and your wife for whatever was left unpaid.

You should contact a local bankruptcy attorney. Debt forgiveness caused by a foreclosure might be taxable, but debt relief obtained in bankruptcy is not.

Re: rights of the 2nd mortgage company after a forclosure

It's note that simple. If the second lien secured by the second deed of trust was "purchase money" (i.e., it was a loan made when you intially purchased the house), then if the second is foreclosed upon, it is over for them--they have lost their security interest. BUT, if the loan is not purchase money, or is a refinance of a purchase money loan, the lender has the option of permitting itself to be foreclosed upon and then suing you for the amount of their loan as a "sold out junior lienholder". Usually what they choose to do depends upon whether there is sufficient value in the house to satisfy both the first and the second; if there is, they will usually step in and "cure" the default on the first loan and then do their own trustee's sale.