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Bankrupt Parties in Title

As a long established title company, we’ve seen through the years in the title insurance industry many items that delay closings which, if detected early enough in the closing process, would have not delayed the settlement process at all.

Here’s a short rule of thumb to commit to memory — Merely because there is a discharge of a debtor in a bankruptcy, the discharge does not necessarily remove the liens of creditors against the debtor’s real estate.

To the contrary, a pre-bankruptcy lien attaches to the real estate just like any other lien, but creditors cannot execute (collect) the debt unless an automatic stay is lifted. After the bankruptcy runs its course through federal bankruptcy court, the debtor’s personal liability is discharged (assuming the court does not dismiss the bankruptcy petition altogether). However, the liens of any pre-bankruptcy judgments still attach to the real estate and must be addressed for clearing title.

When a title company uncovers a lien filed to a bankruptcy that attached to the real estate despite personal discharge of the debtor, a court order avoiding the effect of the lien on the property must be obtained to clear title. This can be done by petitioning the bankruptcy court to “Avoid the Lien” of the creditor so as to allow the property to be sold clear of the effect of the lien.

This process is sometimes overlooked until the latter stages of the settlement process, unfortunately leading to a postponement of closing which we all know is never in the best interests of any party involved.

Therefore, if your title company’s search shows a bankruptcy on title, ask the title company to promptly handle this item, and to accelerate the necessity for the court to avoid the effect of these lien(s) of record so your closing need not be delayed, allowing to you proceed to your next valuable client.


Posted by United One Team Member on 11/3/2014 12:00:00 AM EST

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