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Is this your principle home?
Did you take out the second mortgage when you bought the home? (purchase money)
Is your wife on the mortgage or a guarantor of the sole proprietorship?
How about the other two quesitons...
Sorry I didn't see the other two questions.
We didn't take the second out when we bought the home, we got it about six months later.
And yes, both my wife and I are on the mortgage. But I'm the sole-proprietor, her name is XXXXX XXXXX the company (thus not a guarantor?). Although we file our taxes jointly (don't know if that makes any difference). Thanks.
Ok, then since the 2nd wasn't a "purchase money loan" it would be considered a recourse loan which would give the lender the right to pursue you in the event of a default.
Even if it is a sole proprietorship and she never signed anything, since CA is a community property state, all assets and debts acquired during the marriage are owned by both parties.
Since you both are on the loan, there would be joint and serveral liability and the lender could come after either or both of you (and your assets) in order to collect once they got a judgment. So it would be in your wife's best interest to "assign" her interest in any proceeds for her contract to someone else so that her creditor's can't come after it. The only problem is that any transfer of assets within 6 months from when a creditor files suit can be challenged as "fraud on a creditor" and if successful the transaction can be undone. So if she transfers her interest away and 6 months and one day pass before anyone files suit, then there is no presumption of an intent to defraud.
To cross all the t's and dot all the i's she would need to contact a local contract law attorney to help draft the assignment of income rights to the contract. I would suggest a second contract that would give her the option to repurchase the income rights for $1 that is executed at the same time so that she could reverse the transaction if necessary later.
The other option would be to assign her rights under the contract to an irrevocable trust, but the problem there is that they can never be taken back and have to stay in the trust until it terminated according to whatever terms you put in it.
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