Bulletin: MD000023

Date:
February 01, 1998
To:
All Maryland Policy Issuing Agents
RE:
Underwriting Mortgages, Deeds of Trust and Judgment Liens of Record After Owner/Borrower Declares Bankruptcy, Has Been Discharged, and the Case is Closed

Dear Associates:

THE PROBLEM

There is great confusion in the title examining community as to the status of a title which shows that an owner, either current or back in the chain of title, has gone into bankruptcy, there has been a discharge and the case has been closed. What is the status of mortgages, judgments or other liens against the then bankrupt debtor? Are these judgment lines, etc. which show up in the abstract and on the judgment report still valid liens against the property, or did they get released in the bankruptcy? How do you know?

ASSUME THIS IS THE TITLE SCENARIO

Your abstract shows that your current sole owner brought his house in 1990, securing his purchase money lender with a typical first mortgage or deed of trust. In 1992 the owner got sued by two credit card companies, and they obtained judgments against him in 1993. The judgments have been recorded among the circuit court records, and do not show as having been satisfied and released. In 1994 the owner filed for bankruptcy (makes no difference whether it was Chapter 7 or Chapter 13). You have called the appropriate bankruptcy court's computer clerk and have been told that there was a discharge of the debtor granted and the case has been closed. How do you underwrite the mortgage and the two judgments?

ANALYSIS

Based on nothing but the above scenario, your thought process should tell you that since the then debtor and still owner has apparently retained ownership of his house, the bankruptcy trustee must either have abandoned the house (feeling it was not an asset of any value to the creditors) or for some other reason did not administer the house. At any rate, the house came through the bankruptcy and is still owned by our party. Do you have to be concerned about the mortgage and the judgments? Did they die a natural death when the owner was discharged in bankruptcy? If not, could the debtor have legally killed off the mortgage and the judgments during the bankruptcy?

THE EASY TO REMEMBER, QUICK ANSWER WHICH WILL APPLY ALMOST EVERY TIME

The mortgage and the two judgment liens are almost surely all alive and well, and must be paid off and released before the property can be free and clear of liens prior to the trust and/or the deed you are trying to record. The bankruptcy probably had no effect on the mortgage or the judgments, even though there is evidence that the debtor was discharged and the case has been closed. Why? Because liens (whether a mortgage, deed of trust, judgment lien or other types of liens) pass through a bankruptcy unaffected by the bankruptcy, unless they are specifically dealt with through a lien avoidance adversary proceeding filed with the bankruptcy court during the course of the bankruptcy. Debtors typically have no money to pay their counsel (if they had counsel at all) to file an adversary proceeding to try to avoid the liens during the bankruptcy, and, more often than not, no one has explained to the debtors that the bankruptcy filing alone will not get rid of the judgment liens. The long and short of it is that the typical consumer bankruptcy, both Chapters 7 and 13, do not come to you as a title examiner with lien avoidance having been done. The liens still exist and must be paid off and released.

WHAT ABOUT THE BANKRUPTCY "DISCHARGE" AVOIDING THE JUDGMENT LIENS?

Many if not most people who are generally familiar with bankruptcies (including many lawyers) believe that a discharge of the debtor means that the judgment liens cease being liens following the debtor's discharge and case closure. They believe the judgments are a dead issue and not a problem following discharge. This incorrect belief is due, in large part, to a misunderstanding of what a "discharge" means to a debtor in bankruptcy cases. A discharge means that the debtor is relieved of the personal obligation to pay the discharged debt. It does not mean that the lien which existed prior to the bankruptcy is also discharged. It means that while the debtor has no personal obligation to pay the judgment, the debtor's "house", in effect, is obligated to pay the debt to insure a transfer free and clear of the judgment. If this debtor had not owned the house at the time he declared bankruptcy, there would have been nothing for the judgment to attach to and become a "lien" against. No house, no lien, just a judgment which never became a lien and which gets discharged and becomes history, not to haunt the debtor again!

LIEN AVOIDANCE

It is certainly possible that a bankruptcy case you may deal with will have one or more liens avoided by one of several procedures available to a debtor who is represented by wise bankruptcy counsel and who had money to pay counsel to file and adversary proceeding to attempt lien avoidance. Finding a case where this has been done is the exception rather than the rule, however.

HOW DO I DETERMINE IF LIEN AVOIDANCE HAS BEEN DONE?

You have to investigate the matter by obtaining the bankruptcy case from storage. This can take some time and is not a quick and easy process. It is, however, the only way for a title examiner to know whether or not the liens in question are still a cloud on the title following a bankruptcy.

HOW DO I GET THE LIEN RELEASED?

The creditor is entitled to be paid what he is owned, despite the discharge. The release will be handled just like any other lien on the property which was not complicated by a bankruptcy.

I AM CONFUSED BY THIS. CAN I GET HELP?

Absolutely! Call Company Counsel when you have judgment liens arise in a bankruptcy context. We can go over the situation together and cuss and fuss until we have resolved the liens in a proper underwriting context.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.

References

Bulletins Replaced:
None
Related Bulletins:
None
Underwriting Manual:
2.04 Bankruptcy
Exceptions Manual:
None
Forms:
None