How Bankruptcy Impacts the Transfer of Real Property

The Effect of Bankruptcy on the Transfer of Real Property

Bankruptcy Terms:

Filed - The debtor, or in some cases a creditor of the debtor, files a petition with the bankruptcy court. The court then reviews the petition and determines whether or not the debtor qualifies for bankruptcy.

Dismissed - If the debtor does not qualify, then the bankruptcy is dismissed, which simply means that the debtor is not in bankruptcy and is place back into the position he/she was in prior to the filing of the bankruptcy.

Automatic Stay - If the debtor qualifies, the court enters what is known as an “automatic stay”, which means that the creditors of the debtor are prevented from pursuing actions against the debtor.

Discharged - A Chapter 11 or Chapter 13 bankruptcy case is “discharged” upon the completion of the approved reorganization plan. The case is no longer open and pending at that point, and usually the debtor can sell, purchase, or finance real property during that period without formal court approval. A Chapter 7 bankruptcy case is often discharged long before it is closed, and formal court approval of a transaction is usually necessary.

Closed - When a Chapter 7, Chapter 11, or Chapter 13 bankruptcy case is “closed”, it is over.

Trustee - An individual appointed by the bankruptcy court to supervise the bankruptcy.

Abandonment - The process whereby the trustee “abandons” property from the bankruptcy estate, thereby releasing it to the debtor.

Closing a Real Estate Transaction

In a Chapter 7 bankruptcy, a prior to the court approval of the reorganization plan in Chapter 11 and Chapter 13 bankruptcies, a debtor must obtain one of the following in order to sell, purchase, or finance:

1) A formal court order signed by the bankruptcy court judge approving the transaction and granting relief from the automatic stay to do the transaction, or

2) A formal “abandonment” of the subject property from the bankruptcy estate issued by the trustee assigned to the bankruptcy case.

Once the reorganization plan is approved in a Chapter 11 or Chapter 13 bankruptcy, the transaction can be closed if it is specifically authorized in the plan. If the transaction is not specifically authorized in the plan, then the above (1) or (2) must be obtained in order to close the transaction.

Judgment Debts and Liens

The debts of the debtor (except for alimony and child support debts, student loan debts, and tax debts) that are incurred before and during the bankruptcy are usually “discharged” in connection with the bankruptcy case. The fact that a debt is discharged does not mean that a judgment lien (evidencing the debt) is automatically removed as a lien on the real property interests of the debtor that are part of the bankruptcy estate. In other words, a judgment lien will still attach to the property even after a bankruptcy is discharged and closed unless the lien is removed pursuant to an “order avoiding the lien”, issued by the court, or a customary release of the lien delivered by the judgment creditor.

Fraudulent Conveyance and Preferential Transfers (deeding away property before the bankruptcy)

A transfer within three years prior to the filing of a bankruptcy petition that is made with the intent to hinder, delay, or defraud a creditor of the debtor may be avoided by the trustee (the trustee treats the transaction as if it did not occur). The red flags to these types of transfers may be:

1)   Deeds to spouses, friends, or family trusts without payment, or

2)   A new trust deed specifying a friend or relative as the beneficiary where no money is “loaned”.

The contents contained herein are intended for general informational purposes only, and should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. Anyone needing specific legal advice should consult an attorney.
Equity Title Utah is a Title Insurance Company with 17 branch locations throughout Utah and a title and order processing plant.

Equity Title Utah, August 25, 2008
  

Source: http://www.equitytitleutah.com

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