There are 8.5 million houses and condos in California, and hundreds of thousands of homeowners have mortgages that exceed the current value of their homes.  They are “upside down” on equity in their property.  For some homeowners who have income sufficient to cover the monthly payments on these loans (and often second and third mortgages or home equity lines of credit as well), the situation is painful but manageable.  If they want to sell, they can hang on until the real estate market improves.

For many others who have suffered reduced income from the recent economic downturn, the situation is a disaster.  Foreclosures have skyrocketed in the last two years.  Nearly 80,000 default notices were filed in California in the first quarter of 2010  -  the first step in the process of foreclosure on properties.  If income doesn’t stretch to cover payments on all the mortgage loans, and the homeowner falls behind two or three months, the lender is likely to begin foreclosure and there is little recourse for the owner. 

The owner may try to sell the property, but if the current value is less than the mortgages, he or she will still have to pay off the balance of the liens.  Occasionally, a lender will agree to a “short sale,” where the house sells for less than the first mortgage, and the difference is forgiven by the lender.  The homeowner may still owe the lenders for any second or third mortgages or equity lines of credit.

Some first mortgages are eligible for modification by the lender to reduce the monthly payments temporarily or permanently, but even then, if there are second or third mortgages (which usually can’t be modified), the total may still be more than the homeowner can pay. 

Can a Chapter 13 bankruptcy stop foreclosure and save the home?  In many cases it can, and in some, the homeowner may be able to wipe away second and third mortgages, making the payments manageable for the future.  But it is crucial for the homeowner to take action immediately when a lender serves a notice of default.  It takes time for an attorney to review eligibility for Chapter 13, to work out a payment plan, and to file the bankruptcy petition.  It can’t be done overnight.

A Chapter 13 bankruptcy is designed for those who have a stable, regular income, but are having trouble paying their debts.  In this case, the debtor and the court work out a plan for repaying some or all of the debts, often at a reduced rate, making the total debt and the monthly payments manageable over a period of three to five years.  The court works with the lenders to modify monthly payments so they fit the expected income.

Chapter 13 has important benefits for homeowners facing foreclosure.  It lets a debtor  spread late or unpaid mortgage payments over the period that the plan is under the court’s supervision. 

It may also help eliminate payments on second or third mortgages or equity lines if the current value of the home is less than the amount of the first mortgage.  If there is no equity remaining for the additional mortgage loans, they become “unsecured debts”.  The court may “strip off” these unsecured loans which then take last priority in Chapter 13 plans.  

When foreclosure on a home with second or third mortgages is a major issue, the homeowner and attorney should obtain a professional appraisal of the home before filing the Chapter 13 petition.  This will confirm that the fair market value of the home is less than the balance owed on the first mortgage, and that the additional home loans are unsecured debts.  After filing, the attorney will file a motion requesting the court to remove the additional mortgages.  If granted, the lenders will be ordered to remove the liens from the property.

But the homeowner must keep current on all remaining mortgage payments going forward.   If payments are missed during the plan period, the court has several options.  It may give the lender permission to foreclose; it could convert the case to a Chapter 7 bankruptcy; or the bankruptcy could be dismissed, removing all protection from creditors.  Lenders would then be free to foreclose on the property.  In any case, the stripping of mortgages will no longer be in effect, and the debts will be put back in place and must be paid.

Homeowners who are “upside down” on their home loans and qualify for a Chapter 13 bankruptcy have a powerful tool to prevent foreclosure and reduce monthly mortgage payments to a manageable level.  As long as the plan approved by the court is followed religiously, the home can be saved.

This article is part of an ongoing series of articles pertaining to legal issues in the LGBT community. Previous articles can be viewed at  This information is intended for general information purposes only, and is not intended to provide legal advice.  Christopher Heritage is an attorney in Palm Springs, CA, who focuses on LGBT estate planning, domestic partnerships, same-sex marriage, probate, trust administration, and consumer bankruptcy.  He welcomes questions and comments, and can be contacted at 760.325.2020, or by email: