If you’re refinancing a property that is in bankruptcy, it’s understandable that there is additional documentation your title company will need to review in order to close. Below is a helpful summary of two different types of bankruptcy and the corresponding documentation you’ll need to provide.
Chapter 7 Bankruptcy – Liquidation (More potential for risk)
What we will need to close:
- Copy of petition and schedules of bankruptcy filing which show the subject property was scheduled as an asset of the borrower(s)/debtor(s) estate.
- Order from BK Court authorizing the refinance or an Order from the BK Court evidencing that the BK Court has abandoned the property (Note: A letter from the Trustee is NOT sufficient for a Chapter 7 BK)
- Receipt of Final Order of Discharge of the specific BK Case.
Chapter 13 Bankruptcy – Adjustment of debts (Less potential for risk)
What we will need to close:
- Order from BK Court authorizing the refinance or an Order from the BK Court evidencing that
the BK Court has abandoned the property. (A letter from the Trustee alone is NOT sufficient for a
Chapter 13 BK) - A Payoff Letter from the Trustee
A common misconception from the borrower and loan officer is: “That judgment was included in
my Bankruptcy, what do you mean I have to pay it?”
- Any judgment which was filed in the public records against the borrower PRIOR to the Bankruptcy procedure is not automatically released because the borrower filed Bankruptcy. The bankruptcy only releases the borrower’s personal obligation.
- The only proof‐positive way to release a judgment through Bankruptcy is to have the borrower (or their BK Attorney) file an “Avoidance of Lien” order with the BK Court.
- A judgment which is not avoided still ATTACHES TO THE PROPERTY and must be satisfied/released of record.
- On the positive side . . . any judgment filed during the time the Bankruptcy was in process IS NULL AND VOID and DOES NOT ATTACH to the property.
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