January 2010 Vol. 3, No. 11

Underwriters' Bulletin

Claims Corner

Bankruptcy; Liens

Bankruptcy and Judgment Liens

When preparing a commitment, there are two ways to find out if the buyer or seller has ever declared bankruptcy. First, ask the buyer and seller if they ever declared bankruptcy. Second, search the recorder's records for bankruptcies. If a bankruptcy has been filed, a notice may appear in the recorder's office. If you find either a buyer or a seller with a bankruptcy and recorded liens prior to the bankruptcy, then you must examine whether the bankruptcy affected the liens and whether the liens must be raised as exceptions on the commitment and policies.

Despite a common misconception, property held by a debtor will not always be freed of prior judgment liens if the debt is discharged in bankruptcy. If you find both a bankruptcy and a previously recorded judgment lien on either the buyer or seller, then you must examine the bankruptcy court file and the judgment to see what effect the discharge may have had.

Property the Debtor Owned at the Time of Discharge
Once the recording of a memorandum or a certified copy of the lien in the recorder's office has properly perfected the judgment lien, the lien becomes much like a perfected mortgage. The discharge of a later bankruptcy removes the personal obligation to pay the debt but does not remove the lien against the property. The judgment creditor could still levy and execute on the judgment lien and use the sale proceeds to satisfy the debt. (There could not be any deficiency award, but the judgment creditor can fully realize on the property.)

Therefore, if you discover a judgment lien in the search before the discharge in bankruptcy, you must raise an exception on the commitment and policies for the judgment lien. A Bankruptcy Code procedure called avoidance allows the trustee to eliminate liens. If the trustee has followed all the procedural requirements of the Code, then the lien is eliminated and you do not need to raise an exception for it in your commitment and policy. See theATG Basic Underwriting Manualfor more detailed instruction on this topic.

Property the Debtor Acquired after the Discharge
If the discharge and dismissal in bankruptcy occur prior to the debtor acquiring title to the property, no prior lien attaches. Since the discharge eliminates the debt, the later acquisition of real estate does not create a lien. In this situation, you do not need to raise an exception for a judgment lien on the commitment or policies.

In Wisconsin, under Section 806.19 of the Wisconsin Statutes, a judgment debtor who has received a discharge of a judgment debt in a bankruptcy proceeding may take affirmative steps to remove the judgment as a lien on real property. Any person who has received a discharge of a judgment debt in bankruptcy and any person interested in the real property affected by any such judgment may submit an application for an order of satisfaction of judgment along with an attached order of satisfaction to the clerk of the court in which the judgment rendered void by discharge was entered. The application shall include a copy of the order of discharge that was served on parties of interest by the bankruptcy court. Any person submitting an application must also serve a copy of the application and proposed order on each judgment creditor for each judgment described in the application. Upon receipt of the completed application, the court clerk will submit the proposed order for signature by a judge, after which the clerk shall satisfy of record each judgment described in the application. Upon satisfaction, the judgment shall cease to be a lien on any real property that the person discharged in bankruptcy owns or later acquires. If you find a satisfaction in the chain of title for real estate in Wisconsin, you do not need to raise an exception for the lien.

If you have any questions about this or other related issues, contact the ATG Underwriting Department,legal@atgf.com, 217.403.0020, or 312.752.1990.

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[Last update: 1-18-10]