Governor Schwarzenegger signed California Senate Bill 931 into law. This new law adds Section 580(e) to the California Code of Civil Procedure. While this is great news for borrowers insisting on a short sale, it only applies to the first mortgage. Existing law, CCP 580(d) does not allow a deficiency for a property foreclosed on by the lender that did the foreclosure. Many times lenders would insist on the right to seek a deficiency when they agreed to a short sale. That would substantially alter the rights of the borrower under CCP 580(d). Many borrowers would halt the short sale because of this provision. Now the lenders cannot add the provision
Warning! This new law does not affect a junior lien holder (Second Mortgage). That means that the anti-Deficiency Laws that did not apply to Junior Liens (Second Mortgages) are not changed by this new law. If you have a second mortgage (or a junior lien) before you sing any short sale documents you should consult with an attorney to ensure you make an informed decision based on accurate information. That does not mean that you cannot negotiate with the junior lien holder to eliminate a deficiency. Contractual rights are negotiable between the parties and in some cases junior lien holders are willing to completely release the borrower if the circumstances meet the criteria established by the lender.
If you are in a situation where you may lose your home, you should explore all of your options, including short sales, foreclosure, and bankruptcy. In many situations a home can be preserved through a bankruptcy. Chapter 13 allows the borrower to make up the past due payments over time. If keeping your home is important to you then you should seek competent legal advice.
The new law is shown below for illustration purposes below.
580e. (a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.
(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.
(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.
For example, a home has a First Deed of Trust and a Second Deed of Trust. This is very common in the California housing market. Many homes were purchased with two loans the first for 80% of the purchase price and the second for the remaining 20% of the purchase price. This allowed the first loan to be a conforming loan and qualify for better terms. For this example we will assume the home was purchased for $300,000. The first deed of trust was $240,000 and the second was for $60,000. The current Fair Market Value (FMV) is $225,000. The remaining balance on the First Deed of Trust is $235,000 and the remaining balance on the second is $59,000. In a chapter 13 bankruptcy, the debtor files a Motion to Value the Collateral of the Second Deed of Trust. The Bankruptcy Court would find the collateral securing the Second Deed of Trust is $0.00 because the Senior lien, the second Deed of Trust is greater than the FMV of the property, and therefore the value of the collateral of the Second Deed of Trust is Zero. The court would calculate the value of the collateral of the Second Deed of Trust by subtracting the balance of the senior Lien from the FMV which results in a negative number. ($225,000 – $247,000 = $22,000)
There are 94 federal judicial districts, most of these districts have Bankruptcy Courts. The Sacramento Bankruptcy Court is the Eastern District of California, which is in the Federal Ninth District. The Ninth District decided a case titled In Re Lam 211 B.R. 36 (9th Cir. B.A.P. 1997). Lam held that a lien-strip was possible without an Adversarial Proceeding, but could be accomplished with a noticed motion. The Eastern District allows the lien-strip motion to be included in the original Chapter 13 Plan and if properly noticed will not require an additional noticed motion to accomplish. The motion is granted if there is not opposition filed to oppose the motion and confirmation of the plan.
In the current market where home values continue to decline, a potential bankruptcy debtor should consider filing a Chapter 13 if lien-stripping would make keeping their home feasible given their circumstances.
Filing Bankruptcy in Sacramento or any other Court is a complicated process. Debtors should seek competent legal advice from a qualified bankruptcy attorney before attempting to file on their own. Often Sacramento bankruptcy attorneys will allow some of the attorney fees to be paid through the chapter 13 plan. The Law Office of Peter Cianchetta makes arrangements to pay some or all of the attorney fees to be paid though the Chapter 13 plan.
An Adversarial Proceeding is an ancillary case to a bankruptcy case. It is a case in and of itself to decide a specific issue. An Adversarial Proceeding often has an evidentiary hearing where there is live testimony of witnesses, presentation of evidence and the judge renders a final ruling. The final ruling in an Adversarial proceeding is an Appealable Order that may be brought to the Bankruptcy Appellate Panel or to the Court of Appeals.]]>