If your home is foreclosed or sold at a short sale and your loan is secured by a second or third trust deed that is not purchase money (for example, a home equity line of credit, a loan to pay off credit cards or to make home improvements), you run the risk of the “junior” lender filing suit directly against you on your unpaid notes.
Extinguishing the debt in a short sale is often a matter of negotiating with the bank. But even when lenders are willing to extinguish some or all of the debt, many borrowers may not be aware that they have to ask for a release. So, if you are pursuing a short sale and your second mortgage is not a purchase money loan, it is of the utmost importance for you that the bank release you from any further obligation in the short sale agreement.
A short sale does not automatically extinguish the remaining balance of your non-purchase money second mortgage unless settlement is clearly indicated on the acceptance of offer. If your second mortgage is not paid off in the short sale of your home and your lender will not agree to release you from any further obligation on the debt, then you must negotiate with your lender in order to obtain a settlement of the amount owed. This may include negotiating a payment plan or lump sum payment. If all else fails, then filing bankruptcy may be your only course of action to resolve the debt.