Let’s face it. There aren’t many things that can come up on a title that can cause more panic than the dreaded Bankruptcy. Few people understand the ins and outs of Bankruptcy and they don’t want to. It’s too technical, too complicated and too scary. It’s like an alien from another planet that we fear because we fear the unknown. But Bankruptcy comes up quite a bit, I hate to say, so it pays to have at least some knowledge of the issues. Here’s what you need to know.
First, it’s very common for a homeowner that is in Bankruptcy to sell their property. In this scenario, an order from the Bankruptcy Court approving the sale is almost always required. As a result, it is critical that the seller’s Bankruptcy lawyer know about the transaction so he/she can do what they need to with the Bankruptcy Court to allow the sale to go through smoothly. Often, the seller’s lawyer is totally unaware that their client has signed a sales contract, which can cause delays for the closing if the lawyer has to scramble to get court approval for the sale.
Second, there are some misconceptions regarding how a Bankruptcy affects the title of property owned by the person who files Bankruptcy. The issue that causes the most confusion is where the Debtor/Seller has judgments against them – and they often do. We all know, or should know, that a judgment is a lien against property owned by the judgment debtor, with only a few exceptions. That’s why judgments show up on a title commitment. But, confusion sets in (and sometimes anger) when judgments are listed on a title commitment after the seller has gone through a Bankruptcy proceeding.
How can this be? Doesn’t the Bankruptcy extinguish debts? Isn’t that the point of going thru a personal Bankruptcy? The answer, of course, is yes – a Bankruptcy does extinguish the “personal obligation” to pay most debts. The problem is that even though the seller’s personal obligation to pay a certain judgment is gone, the judgment lien still exists because that is against the real estate, not the person. And, although there is a Bankruptcy Court procedure to remove the judgment lien, it’s an extra step in Bankruptcy that is rarely done.
So, as usual, the moral of the story is that knowledge and preparation are the best weapons to ward off panic and stress. If your seller is in Bankruptcy, make sure his or her lawyer is aware. Run a preliminary title to see if there are any surprises like judgments lurking around the corner, and talk to the seller and/or your title company about what needs to be done to make sure the seller can deliver a good title. The good news is, rarely have I seen a deal fall through because of these issues. We can almost always find a way to close.
I hope everyone has been having a fun and profitable year so far – and have a great end to summer!
As the leading title company in St. Louis, Investors Title is committed to providing exceptional service and helpful insights to all our clients. Whether you’re in need of commercial title services, residential title services, or another form of title and closing services, Investors Title can deliver the results you expect and deserve from an industry leader. Get in touch with us today!