Judgment Lien Avoidance in Bankruptcy
Nothing brings excitement to a title professional’s day like a bankruptcy proceeding or filing showing up in their chain of title. Okay, excitement is the wrong word, but there are strong feelings evoked when bankruptcy gets mentioned in a real estate transaction that you thought was going to be an “easy one.” Let’s assume that the bankruptcy proceeding is closed and the debtor (your seller) is correctly discharged without issue. You are in the clear, but your title work shows a prebankruptcy judgment lien that was attached to property that your seller owned prior to filing for bankruptcy. How many times has a seller said, “I do not have to pay that judgment lien off because I had it taken care of in bankruptcy”?
Red Flags to Consider When Reviewing a Bankruptcy as a Title Professional
While lien avoidance is possible in bankruptcy proceedings under 11 USC §522(f), it requires certain determinations be made for the avoidance of a particular lien to be authorized. What sort of lien is involved? What if it is a judgment lien? Is it or is it not subject to lien avoidance?
First, you must determine that the lien avoided by bankruptcy court order was a judgment lien. Note that judgment liens for a domestic support obligation (child support, alimony, or maintenance) are not subject to lien avoidance.
Second, you must determine if an exemption was impaired. Depending on your state, it may be a federal exemption, but other states have adopted their own. How can you tell which is involved? If you know the formula for an impairment of an exemption, it will help clear a major roadblock.
Stewart Guidelines for Determining Property Value for Independent Title Agents
We require title agents to review the motion and order avoiding lien to determine what amount is used for the value of the property and to what extent the lien impairs the exemption right prior to any policy being issued. How should you review the filings? What issues might arise that could slow the transaction?
The information provided here is for general informational purposes only, should not be relied upon, and is subject to change without notice.
Reach out to your local Stewart representative for more information. Visit virtualunderwriter.com for up to date information on the latest in underwriting.
If you are a Stewart Trusted Provider™, feel free to contact your Stewart underwriting counsel with questions.
Interested in learning more? Explore these other underwriting tips.
Beware of Title Derived Through Tax Sales
Do You Have a Mechanic’s Lien Issue?
Underwriting for Cash Transactions
Protect Sellers from Loan Modification Claims
Navigating Title Insurance for Submerged Lands and Shorelines
What is a Collateral Assignment of Mortgage and How Do You Handle It?
ALTA Best Practices 4.1 Proposed Revisions
Does the Underwriter Cover the Gap?