January 2009 Vol. 2, No. 1

Claims Corner

Bankruptcy

Bankruptcy Issues in the Claims Context

In the context of claims, ATG most frequently sees the following three bankruptcy-related issues:

1. Liens that were not released. There is a common misconception that liens are eliminated in a bankruptcy. Only the personal liability of the debtor is discharged in bankruptcy. The lien is still enforceable against the property and a judgment creditor could foreclose on the lien. Therefore, a recorded judgment should not be waived merely because of a bankruptcy discharge. In order to waive the judgment that was recorded prior to the bankruptcy, there must be an order entered in the bankruptcy case indicating that the judgment is not a lien against the property. After the personal liability of the debtor is discharged, the lien will not attach to after acquired real estate.

2. Mortgages recorded without all the necessary information. It is also important to check the documents from the closing before they are recorded. This seems like a minor issue, but catching problems before documents are recorded can help avoid claims. In a previous issue of the Claims Corner, I detailed the Omitted Mortgagor Claims that ATG receives on a frequent basis. The general rule to remember is that anyone who owns the property must also unconditionally mortgage the property and be listed as a mortgagor on the mortgage. We also run into mortgages that are recorded without a legal description. The lack of a legal description and/or an omitted mortgagor causes problems in the bankruptcy context. A recent claim involved a mortgage that was recorded without a legal description. The mortgagor filed for bankruptcy and the bankruptcy trustee filed an adversary complaint to avoid the insured mortgage.

3. How property of a bankrupt is transferred. If a bankruptcy has been terminated and the debtor discharged, the bankrupt can transfer the property without anything further. A discharge alone is not enough. The case must also be terminated or closed. If the bankruptcy is still pending, the property can be transferred if there is an order in the bankruptcy case allowing the sale. Any liens not eliminated in the bankruptcy must be paid. There will usually be conditions on the transfer, such as requiring that all proceeds of the sale go to the bankruptcy trustee. All conditions must be met in order for the transaction to disburse.

If you have any questions about whether a lien can be waived or whether a bankrupt can transfer property, contact the ATG Underwriting Department, legal@atgf.com, 217.403.0020, or 312.752.1990.