Given the information you provided, you can file
a Bankruptcy in California or Arizona, but you must use the Arizona exemptions - regardless of where you file - since that is where your primary residence has been for the past two years.
To pass the Means Test
- which allows you to file a Chapter 7 - the gross monthly income for a family of 4 in California must be less than $6,572
. For Arizona the amount is $5,593
. This means you can currently file a Chapter 7 in California, but not in Arizona. However, if you wait until you retire, you can file in Arizona.
Chapter 7 does not allow you to liquidate a second mortgage, or to remove the second mortgage lien. However, this can be done by filing a Chapter 13, where you have to pay all disposable income to the Bankruptcy court
for 3 years. At the end of the 3 years, the balance of the second mortgage - and the lien - can be discharged.
(Disposable income is your gross income minus allowable expenses.)
From the information you provided, it looks like filing a Chapter 13 is a good option.