San Diego Bankruptcy Lawyer Help| Deficiency After Foreclosure Under California Law

California has three separate statutory provisions that prohibit a lender from obtaining a deficiency judgment after foreclosure.  These provision are found at Cal. Civ. Proc. § 580b, Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a), and after July 15th, 2011, Cal. Civ. Proc. § 580e.  A deficiency is simply the loss that a lender sustains after the property is foreclosed.  The deficiency is measured by the difference between what is owed on the loan and what the bank collected from selling the property after foreclosure. A deficiency judgment after foreclosure may result in a wage garnishment, bank account levy, and a judgment lien against other property owned by the borrower.  Because of the seriousness of a deficiency judgment sound legal advice should be sought out whenever foreclosure appears imminent.
If a borrower is facing an imminent foreclosure or has already had a property foreclosed and one of the California statutory provisions to be discussed below is not helpful a bankruptcy discharge may be the only means of averting the negative consequences of a deficiency judgment. In reviewing options with a client as a bankruptcy attorney, I always start with non-bankruptcy law.  With that in mind I summarize the non-bankruptcy protections found in the California anti-deficiency provisions.
The first statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580b. Cal. Civ. Proc. § 580b protects a borrower from a deficiency after foreclosure where the property is occupied by the borrower as a personal residence and where the money borrowed from the lender was used for the purchase of the property.  This provision does not protect a borrower where the property is not a dwelling occupied by the borrower or where the loan was not part of the financing used to buy the property.  Specifically this provision does not protect a borrower if the loan was a refinance loan or an equity line of credit.
The specific language of  Cal. Civ. Proc. § 580b reads as follows: “[n]o deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser. 
The second statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580d. Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a) is often referred to as the “Single Action Rule.”  Basically what this means is if a lender non-judicially forecloses on the property (power of trust deed sale) they may not later seek a deficiency.  Practically speaking this means that in over 99% of foreclosures by a senior lienholder (the holder of the first Trust Deed) the senior lienholder will not be able to collect a deficiency.  However, note in rare cases where the property has very little value or no value and or if the borrower has independently very deep pockets the lender may choose judicial foreclosure and after the foreclosed property is sold obtain a money judgment for the balance of the loan.   One of the reasons that judicial foreclosure is rare in California is that it can take the lender much longer to ultimately foreclose on the property.
Another problem with the “Single Action Rule” is that it does not protect the borrower from being sued by a junior lienholder who either waives their right to foreclosure or sues after the property is foreclosed by the senior lienholder. Very frequently, a borrower will wind up owing a deficiency to a junior lienholder after the senior forecloses where the junior lien arose out of a home equity line of credit or from a refinance that included a second.  The term that is often associated with this a “deficiency from a sold out junior lienholder.” However where there is a “sold out junior lienholder” there is case law that may still prohibit them from collecting on the deficiency.  One California appellate case holds if the senior lienholder and the junior lienholder are one in the same than the foreclosure by the senior lienholder precludes the collection of a deficiency by the junior. The junior lienholder is deemed to have sold itself out and elected its sole remedy on CCP 726(a). Simon vs. Superior Court, 4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 (1992).  Taking this one step further the California Court of Appeal recently held that where the senior and junior are owned by the same bank that an assignment to another lender of the junior after foreclosure does not allow the assignee to collect a deficiency.  Bank of America vs. Mitchell, 2012 Westlaw 1177866 Cal.App.  However the lender may circumvent the Simon and Bank of America vs. Mitchell results by assigning the junior trust deed prior to foreclosing on the senior trust deed.  National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 115 Cal.Rptr.2d 37 (2001).
The last statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580e. Cal. Civ. Proc. § 580e only became effective July 15th, 2011.  The provision expands anti-deficiency protection to all mortgages or deeds of trust if all lenders agree to a short sale.  A short sale occurs when the lender allows homeowners to sell their property for less than the amount owed to the lender. Although the lender receives less than the full value of the loan in a short sale, the lender avoids the costs of both the foreclosure and resulting expenses of a property which would end up with the lender. All lenders still have to agree to a short sale process. The law also makes clear that the protections do not apply to commercial loans with multiple security which includes a security interest in residential property.
As discussed earlier consulting with bankruptcy counsel early on may allow a distressed borrower to explore the greatest number of available options.  Bankruptcy may be used not only to avert the negative consequences of a deficiency judgment but a Chapter 13 may sometimes be also be used proactively to get caught up on defaulted payments or to avoid/ strip a wholly unsecured junior lien from the property altogether.  Please feel free to contact my office for assistance.