Legal Question in Real Estate Law in California

You might have some problems.

First of all, in California, we don't have mortgages. The law provides for them, but no one uses them. The security instrument of choice is the deed of trust. I point this out because people use the search term "mortgage" when doing internet research, and don't realize that there are fundamental legal differences between a mortgage and a deed of trust.

When property is sold, through escrow, the existing debts secured by the deed or deeds of trust are paid off in escrow with the sale proceeds. The remaining balance goes to the homeowner, and that amount is referred to as the equity.

Property sold with existing deeds of trust are sold in one of two ways: they are either sold subject to the existing deed of trust, or subject to the existing deed of trust coupled with an assumption. When property is sold with an assumption, the lender agrees that the new owner will be personally liable for the existing debt. As you can see, regardless of whether the property is sold with an assumption, the property is always subject to existing deed of trust. That means a default in the loan will lead to foreclosure, regardless of who owns the property.

Transfer of the property without payoff of the loan almost always triggers a "due on sale" clause in the deed of trust, subject to several narrow exceptions. This means that the entire note becomes due and payable, even if the new owner or the old owner is still making payments.

So if you sell your home and only payoff the first, the second will become the new "first" and will have priority. If the new owner is willing to face the risk of being subject to the unpaid second, then that is fine.

You also mention that you are in Chapter 7, which means you have a bankruptcy estate that is being administered by a bankruptcy trustee. Sale of assets in the bankruptcy estate will require trustee approval.

I suggest you speak at length with your bankruptcy attorney.