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Title Matters: Bankruptcy Meets Title

The change in financial circumstances for many families over the last two years has changed drastically. Bankruptcy filings often rise in times of economic uncertainty and many look to filing to save their homes, keep their vehicles, or prevent their income from being garnished. The Bankruptcy Act of 1898 was the first piece of legislation to give distressed individuals protection from creditors. If homeowners hold title to real property, filing bankruptcy places an automatic stay onto that property. This can disrupt the homebuying process if an open bankruptcy exists because there are now approvals needed for that seller to transfer ownership or refinance.

Any co-owners of the property are affected in a bankruptcy filing. A co-debtor is an additional individual that is obligated under the terms of the debt, but not necessarily the same person who filed the bankruptcy petition. For example, if a married couple owns a property together and only one spouse files bankruptcy, the other spouse is still considered a “co-debtor’’ under bankruptcy law and the same stipulations will apply to a co-debtor as the debtor in relation to selling or refinancing the property.

Bankruptcy is an area that requires careful focus on the specific terms of the transaction. Each situation can vary from one to the next and the stage of bankruptcy can determine how we proceed to the closing table. Your title agent does not need to be a bankruptcy attorney to clear the matter, but they do need the knowledge of what it takes to move past the issue and get to the closing table for the new buyers. Bankruptcy will always be examined by the title agent to determine the status and any further requirements needed prior to closing.

3 Statuses of Bankruptcy:

1. Pending

A good title agent will run a bankruptcy search on the sellers and buyers of any real estate transaction prior to closing. With this, we are looking for anything that is open or pending. With a pending bankruptcy, the buyers or sellers will likely need to seek out court approval for any action they intend to take with the property. The transaction cannot move forward without those approvals.

2. Discharged

Bankruptcies found vs. the buyer or seller of a transaction will always reference the status. If a Bankruptcy is discharged, it will then be reviewed by the title agent to confirm the date of discharge and that it has gone to final decree. The Discharge date refers to the date the liability of debt is removed, while final decree refers to the date the case was closed by the court. If a matter was discharged, but not gone to final decree, then the party must work with their trustee to get the matter closed once and for all.

3. Dismissed

Dismissed bankruptcy means that it was never completed, and it was thrown out by the court to be considered void. Dismissed bankruptcies are considered a non-issue and treated as if it never happened.

Discovering bankruptcy during a title report can raise many unexpected questions and take a transaction down the road of issues. Using a title company with the knowledge of how to efficiently clear those issues will keep the transaction moving smoothly in the right direction. There are several types of bankruptcy and each one comes with their own regulations and stipulations. When it comes to dealing with bankruptcy and title issues, experience matters.

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