A Bankruptcy proceeding is the procedure whereby a debtor seeks relief from creditors. There are several areas of concern relating to bankruptcy:

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1 BANKRUPTCY A proceeding is the procedure whereby a debtor seeks relief from creditors. There are several areas of concern relating to bankruptcy: Automatic stay As soon as a bankruptcy petition is filed, an injunction is automatically imposed against all creditors of the debtor to prevent creditors from enforcing or attempting to enforce their rights against the debtors assets. Note, however, the stay will act to toll the running of statutes of limitation for the enforcement of liens against real estate. The lifting of the automatic stay by an order of the bankruptcy court will permit the specific creditor to proceed to enforce their rights against the debtor. However, the lifting of the automatic stay does not permit the debtor in bankruptcy to deal with the real estate without court authorization. Authorizations Generally, prior to any conveyance, lease or mortgage by the debtor and/or the bankruptcy trustee, court approval will be necessary. Payment Debts may be repaid either through liquidation (wherein assets are sold and the proceeds are divided among creditors) or through a reorganization or repayment plan. Chapter 7 = Liquidation Chapter 9 = Municipality Debt Adjustment Chapter 11 = Reorganization (usually corporate, but may be individual) Chapter 12 = Family Farm Debt Adjustment Chapter 13 = Individual Debt Adjustment Discharge A discharge prevents any further collection attempts by listed creditors against the debtor personally. It does not mean that the case is closed nor does it prevent enforcement against the debtor s prepetition assets. Thus, pre-existing liens against pre-petition real property are not wiped out by the discharge. Additionally, debts arising out of alimony, child support, student loans, and obligations resulting from fraud are generally not dischargeable. 1

2 Abandonment An order of abandonment by the bankruptcy court removes the specific property from the bankruptcy estate. The debtor in bankruptcy can then deal with the property without court approval. This is typically only done when the debtor in bankruptcy has no equity (after taking into consideration any applicable exemptions such as homestead) in the property and the asset is deemed worthless. Orders of abandonment can be relied upon 14 days after they are entered. The abandonment order does not have the same effect as the lifting of the automatic stay and creditors are still prohibited from bringing actions against the debtor in bankruptcy regarding the abandoned property. PENDING BANKRUPTCIES SCHEDULE B Raise the following exception: PROCEEDING PENDING IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ILLINOIS AS CASE NUMBER, IN RE THE ESTATE OF, ON A PETITION FILED FOR CHAPTER BANKRUPTCY. Land Trust Beneficiaries as Debtors: Whenever the searches disclose the name of an apparent beneficiary, the name search should include such party/ies. The most common instances in which the searches may disclose the possible beneficiaries are: An exempt deed in trust, wherein the grantor(s) are usually presumed to be the beneficiaries of the titleholding trust; A document (most typically an assignment of rents or UCC financing statement) executed by someone other than the titleholding trustee; and A court proceeding in which the titleholding trustee as well as another party are named as defendants. NOTE: A COMPLETE EXAMINATION OF SAID PROCEEDING HAS NOT BEEN MADE. If a trustee has been appointed, the following exception should be raised on Schedule B: RIGHTS AND POWERS OF THE TRUSTEE APPOINTED IN CASE NO. 2

3 Any title order in which a debtor in bankruptcy is attempting to sell convey or encumber the real estate during the pendency of the bankruptcy requires the approval of an underwriter of the company. Most such instances will require that an Order of Abandonment of the real estate be entered by the bankruptcy court. EXTENSION OF LIMITATIONS PERIOD Consider the effect that the bankruptcy stay may have had on the running of statute of limitations for the enforcement of mechanics lien claims, judgments, etc., against the land. If the limitations period has been tolled by a bankruptcy, add an office information note to the lien exception warning other examiners that the limitations period has been extended so that the exception is not waived in error. DO NOT WAIVE SECURED LIENS ON THE BASIS OF A BANKRUPTCY DISCHARGE - A bankruptcy discharge only relieves the debtor from personal liability for those debts which have been discharged. It is well-settled that a pre-existing lien is not affected by a bankruptcy discharge. See, e.g., First Federal Savings Bank v. Drovers National Bank, 237 Ill. App. 3d 340 (2d Dist. 1992); First National Bank in Toledo v. Adkins, 272 Ill. App. 3d 111 (4th Dist. 1995). Requests to waive a lien because of a bankruptcy (when, for example, a bankruptcy court and a state court have entered orders which purport to void a lien) should be referred to a company underwriter. BANKRUPTCY COURT ORDERS REMOVING LIENS FROM SPECIFIC REAL ESTATE court orders removing specific liens from specific real estate may be relied upon in order to waive exceptions for those liens. The bankruptcy case has to be reviewed to see if the debt was scheduled and proper notice was given to the creditor. The company will require that 14 days elapse from the entry of the order prior to waiving the exception. Orders entered in other than Chapter 7 bankruptcies may not be relied upon until successful completion of any reorganization plan. Waiving liens upon real estate in reliance upon a bankruptcy court order should be approved by an underwriter of the company. 3

4 FRESH START THEORY One of the purposes of bankruptcy protection is to give the debtor a financial fresh start. Thus, if the debtor has properly scheduled a debt in the bankruptcy proceeding, and the if the debt was covered by the discharge given to the debtor, then that debt will not attach as a lien to any real property acquired by the debtor after the date of discharge. This is true even if the debt was secured such as a recorded memorandum of judgment. The bankruptcy case has to be reviewed to determine if the debt was scheduled and discharged. Certain types of debts cannot be discharged and will have to be shown even if they are against a purchaser who has gone through bankruptcy. The most common of those are: Criminal fines and debts: All court fees and court-ordered judgments related to any criminal activity cannot be discharged -- neither are any judgments or debts incurred as a result of personal injury or death to others caused by your own negligence or criminal activity; Student Loans: that have been in repayment status for at least seven years. Although there is a general policy not to discharge student loan debt; in some very rare circumstances, older student loans can be discharged, particularly if a hardship condition exists; Taxes: Federal, state and municipal taxes that became due within the last three years; Fraudulent debts: Any debt that the court finds was obtained fraudulently or illegally will not be discharged. For example, if you ran up debt on a credit card shortly before filing bankruptcy (within 60 to 90 days of filing), the court will refuse to discharge that debt. In addition, if you lied on a loan application to obtain funds -- that related debt will not be forgiven in bankruptcy; Dischargeable debt you incurred to pay off nondischargeable debt: For example, you cannot take a cash advance on a credit card to pay off last year's taxes, just so you can write it off in bankruptcy; Alimony and child support payments: (court-ordered) are not dischargeable; Divorce and property settlements: are not dischargeable unless the other party agrees to it. 4

5 COURT PROCEEDINGS EXAMINATIONS Actions taken in violation of a bankruptcy stay are void. If you are performing a necessary parties examination, verify that the automatic stay has been lifted to permit the party to proceed against the debtor in bankruptcy. The discharge of the debtor terminates this automatic stay. If the debtor has been discharged an order lifting of the stay is not required. If the automatic stay is still in place, raise the following note: (requesting that the stay be lifted): AN ORDER SHOULD BE ENTERED IN THE BANKRUPTCY PROCEEDING NOTED ABOVE IN SCHEDULE B AUTHORIZING THE FILING OF THE CONTEMPLATED PROCEEDING. If examining a subsequent stage of the proceeding (e.g., after complaint or after judgment) and actions were taken in the proceeding in violation of the stay, raise the following (requesting that the stay be annulled): AN ORDER SHOULD BE ENTERED IN THE BANKRUPTCY PROCEEDING NOTED ABOVE IN SCHEDULE B ANNULLING THE AUTOMATIC STAY AND RATIFYING ALL ACTIONS TAKEN IN SAID FORECLOSURE PROCEEDING IN VIOLATION OF THE STAY. THIS COMMITMENT IS SUBJECT TO SUCH FURTHER EXCEPTIONS AS THEN MAY BE DEEMED NECESSARY. In addition, when performing any after judgment or after sale proceedings examination, the effect that the stay may have had on extending the mortgagor s redemption period should be considered. PRIOR BANKRUPTCIES A bankruptcy case terminates when the case is either closed or dismissed and the trustee, if one has been appointed, has been discharged. Exceptions relating to right of appeal normally need not be raised relative to a bankruptcy unless either: (1) the order closing or dismissing the case was docketed within the last 14 days; or (2) real estate that was owned by the debtor at the time of the bankruptcy was not scheduled as an asset in the bankruptcy. In the latter instance, a company underwriter normally should be consulted before raising the exception. 5

6 INSURING TITLE THROUGH A BANKRUPTCY SALE If asked to insure a sale, lease, or mortgage through a bankruptcy, consult with a company underwriter. If a sale free and clear by the bankruptcy trustee is anticipated the following exception can be raised: In the event title is to be conveyed by the trustee in bankruptcy pursuant to an order for sale free and clear of liens pursuant to Section 363 (f) of the Code we should be provided with: a. Copy of the motion for sale free and clear; b. proof of service of motion on any parties whose interests are being affected by the sale; c. Copy order entered for sale free and clear; d. Copy of bankruptcy court docket sheet; e. Schedule of creditors. Upon review of the above requested documents this commitment will be subject to such further exceptions as are then deemed necessary. Note: Provisions of Rule 8002 and Rule 6004(g) prevent any sale from being insured until the 14 days from the entry of the order for sale on the docket. APPEAL AND STAY PERIODS FOR BANKRUPTCY COURT ORDERS The Federal Rules of Procedure (FRBP) were amended, effective December 1, 2009, to substitute a deadline which is a multiple of seven days for previously existing filing deadlines. Most importantly for our purposes is the impact of that change on FRBP 6004 (h), FRBP 8002 and FRBP FRBP 8002 now provides 14 (fourteen) days from entry on the docket to file an appeal from an order. As before, when the final day of a deadline falls on a Saturday, Sunday or holiday for the federal court involved, the final day becomes the next day the court is open for business. 6

7 FRBP 6004(h) (for sales of property) and FRBP 8017 (for any court order) are amended to increase from 10 to 14 days the time during which an order, decree or judgment of bankruptcy court is automatically stayed, unless otherwise ordered by the court. As before, remember that a court may lift the FRBP Rule 8017 automatic stay (stay of the order this differs from the automatic stay upon filing for bankruptcy previously discussed), but cannot lift the appeal period. The appeal period runs concurrently with automatic stay. In addition, the FRBP 6007 (notice of intent to abandon) period is changed from 15 days to 14 days, and the FRBP 6004(a) and FRBP 2002 (a) (notice of intent to sell) period is now 21 days, from the previous 20 days. CAUTION: The above comments are only a brief synopsis of some of the more common issues involved in dealing with bankruptcy situations. For a more detailed explanation, see the various topics on pages in the December, 1999 UNDERWRITING DESKBOOK. 7

8 To determine whether a bankruptcy has been filed; to check the status of a pending bankruptcy; or to obtain the case number, attorney s name, trustee s name, or debtor s social security number, call the following bankruptcy information hotlines or check the following websites: Southern District Central District Northern District court cases can be reviewed at low cost by establishing an account at 8