At the Intersection of Real Property and Bankruptcy

At the Intersection of Real Property and Bankruptcy Michael E. Kreun Beisel & Dunlevy, P.A. MichaelK@bdmnlaw.com Jacqueline J. Williams Manty & Associates, P.A. JWilliams@Mantylaw.com

I. Bankruptcy Basics. The public policy behind the bankruptcy code is to better allow individual and corporate debtors in financial difficulty to avoid certain debts and have a fresh start so the debtors can be productive members of society rather than burdens to the social welfare system. Generally, unsecured creditors, such as credit card creditors and open account creditors, receive the worst treatment in bankruptcy, while secured creditors, such as mortgage lenders, receive better treatment. The bankruptcy code is organized into 5 different chapters: Chapter 7: Liquidation, individual or entity Chapter 9: Municipalities Chapter 11: Reorganization, wealthy individual or entity Chapter 12: Family Farms or Fisherman Chapter 13: Individual wage earner, structured payment The most common types of bankruptcy are the Chapter 7 liquidation for consumer and corporate debtors, Chapter 13 reorganization for individuals, Chapter 12 for farm debtors, and Chapter 11 reorganization for corporations and individual debtors with significant assets and income. II. Bankruptcy Estate. The bankruptcy estate is defined by 11 USC 541: 2

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. (2) All interests of the debtor and the debtor s spouse in community property as of the commencement of the case that is (A) under the sole, equal, or joint management and control of the debtor; or (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor s spouse, to the extent that such interest is so liable. (3) Any interest in property that the trustee recovers under section 329 (b), 363 (n),543, 550, 553, or 723 of this title. (4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510 (c) or 551 of this title. (5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date (A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor s spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan. 3

(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case. (7) Any interest in property that the estate acquires after the commencement of the case. When the debtor files bankruptcy, all property owned by the debtor becomes part of the bankruptcy estate. An individual debtor has the right to claim certain property as exempt, which causes the exempt property to be reinvested in the debtor if an objection is not timely made. The bankruptcy estate also includes property that is not scheduled. Chapter 7 trustee generally do not make distributions to secured creditors. Typically, secured creditors are entitled to recover on their collateral, which compensates them for their claim. From the estate, administrative expenses are the first to be paid, followed by priority claims and then general unsecured claims on a pro rata basis. Debtors in bankruptcy typically do not have much money available for discretionary spending, so they frequently do not record the documents necessary to prove that their property is no longer in the bankruptcy estate. There are six ways the property can leave the estate. Unless one of those ways was properly utilized and documented, the property could still be part of the bankruptcy estate and could be unmarketable. III. Automatic stay. 4

When a debtor files for bankruptcy, the commencement of this action acts as an automatic stay of all actions designed to collect the debts of a debtor in bankruptcy. 11 U.S.C. 362. 11 USC 362, (a) states: (a) Except as provided in subsection (b) of this section, a petition filed under section 301,302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before 5

the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. All actions related to debt collection must then be made through or with the permission of the bankruptcy court. Penalties for willful violation of the automatic stay include actual damages (including costs and attorney fees) and punitive damages. Civil Actions and Foreclosures. All civil actions and foreclosures must be put on hold until the property leaves the bankruptcy estate as listed below, or until the creditor has received stay relief from the bankruptcy court. Violating the Automatic Stay. 11 USC 362(k): (k) (1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. (2) If such violation is based on an action taken by an entity in the good faith 6

belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages. Violations Void or Voidable Circuit Courts are split on whether violations of the automatic stay render the act void or voidable. The Eighth Circuit has held that it renders the act void. In re Vierkant, 240 B.R. 317, 323 (8th Cir. B.A.P. 1999) Retroactive Relief From Stay Possible, but Rare Courts have interpreted 11 USC 362(d) to allows for retroactive relief from the automatic stay. Vierkant at 324. Courts have found no inconsistency between an act being void ab initio and the possibility of retroactive relief from the stay. Id. However, retroactive relief from the automatic stay should be granted only sparingly and in compelling circumstances. Id. (citing Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 978 (1st Cir. 1997) IV. Lien avoidance. A mortgage holder must quickly record the mortgage to survive bankruptcy attack. Otherwise, if the mortgage debtor files bankruptcy, the automatic stay will operate to prevent recording of the mortgage. See 11 U.S.C. 362. It also imperative that the legal description in the mortgage is accurate and that the mortgage is recorded in the correct office. Perfecting of the mortgage implicates various types of avoidance claims by the Trustee. A. 11 USC 544 Strong-Arm 7

If the lien is not perfected at the time of the bankruptcy, the bankruptcy trustee has the rights of a good faith purchaser of the property to avoid the lien and sell the property free and clear of the mortgage. Section 544 allows the trustee to avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by... (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. 11 USC 544 (b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law [state law] by a creditor holding an unsecured claim (2) Paragraph (1) shall not apply to a transfer of a charitable contribution Under 11 USC 544 (a) the Trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law [state law] permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. The bankruptcy trustee is automatically put into the position of a bona fide purchaser regardless of the trustee s own knowledge. In re Keenan, 96 B.R. 197 (Bankr. D. Minn. 1989). Bankruptcy Court follows state law when determining the extent of a 8

trustee s powers as a bona fide purchaser. In re Carpenter, 266 B.R. 671, 674 (Bankr. E.D. Tenn. 2001). Most battles under Section 544 involve whether the mortgage or lien was properly perfected under state law. Common mistakes that lead to a Section 544 Strong-Arm claim include an unrecorded mortgage, an error in the legal description, recording of the mortgage in the wrong office, unsigned or improperly executed mortgages, mortgages signed by a party not in record title (i.e. owned by an LLC, signed by an individual). B. 11 USC 545 The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien-- (1) first becomes effective against the debtor-- (A) when a case under this title concerning the debtor is commenced; (B) when an insolvency proceeding other than under this title concerning the debtor is commenced; (C) when a custodian is appointed or authorized to take or takes possession; (D) when the debtor becomes insolvent; (E) when the debtor's financial condition fails to meet a specified standard; or (F) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien; (2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the 9

commencement of the case, whether or not such a purchaser exists, except in any case in which a purchaser is a purchaser described in section 6323 of the Internal Revenue Code of 1986, or in any other similar provision of State or local law; (3) is for rent; or (4) is a lien of distress for rent. Statutory lien means lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute. 11 U.S.C. 101(53). Section 545 is the exclusive provision under which a trustee can avoid a statutory lien. In re Sullivan, 254 B.R. 661, 666 (Bankr. D.N.J. 2000). C. 11 USC 547 Preferences Under Section 547 of the Bankruptcy Code, a preferential transfer occurs when one creditor is preferred over another just prior to the bankruptcy. A preferential transfer, under Section 547, is any transfer of an interest of the debtor to or for the benefit of a creditor, for or on account of an antecedent debt made while the debtor was insolvent, made on or within 90 days before the date of filing of the petition (one year if the transferee is an insider), and that enables the creditor to receive more than it would have received if the transfer had not been made and the case were a liquidation case under Chapter 7. Funds or property which unsecured creditors obtained from the debtor 10

within 90 days before the bankruptcy petition is filed will likely be considered by a trustee to be preferential. There are several exceptions to the preferential transfer provision under Section 547, including: 1. Contemporaneous exchanges under Section 547(c)(1) where a new value is given for the lien or security interest. 2. Section 547(c)(2) for payments made in the ordinary course of business. Defendant may defend by showing that the debt was incurred in the ordinary course of business, the transfer was made in the ordinary course of business, or the transfer was made according to ordinary business terms. 3. Section 547(c)(3) - creation of a security interest in property acquired by the debtor for new value where the funds used are, in fact, used by the debtor to acquire the property, and where the security interest is perfected on or before 30 days after the debtor receives possession of such property. 4. Section 547(c)(7): bona fide payments of a domestic support obligation are not avoidable 5. Section 547(c)(8) - de minimis exception for payment to transferring less than $600. 6. Section 547(c)(9) - De minimis exception for business debtors: If the debtor s debts are not primarily consumer debts, then preferences totaling less than $6,225may not be avoided. 7. Section 547(h) - Payments made according to an alternate repayment 11

plan created by an approved credit counseling agency are not avoidable. D. 11 USC 548 Fraudulent Transfers The trustee (or in some circumstances the debtor) may avoid prepetition transfers of the debtor s interest in property made within two years prior to filing the bankruptcy petition made with actual intent to hinder, delay or defraud creditors. More importantly, for a creditor who may have benefited from a transfer of property, transfers made for less than reasonably equivalent value, and where the debtor was insolvent at the time of the transfer, or became insolvent as a result of the transfer, may be set aside. The trustee may also use state law to avoid transfers of an interest of the debtor, if avoidable under state law by a creditor holding an unsecured claim. E. 11 USC 549 Post-petition Transactions Subject to certain exceptions, a trustee or a chapter 11 debtor-in-possession may generally avoid a transfer of property of the bankruptcy estate that occurs after the commencement of the bankruptcy case. 11 U.S.C. 549. A transfer may be avoided under Section 549 if: (1) the property was property of the estate, (2) the property was transferred, (3) the transfer was made post-petition, and (4) the transfer was not authorized by the bankruptcy code or the court. The definition of transfer is expansive. 11 U.S.C. 101(54) defines transfer as follows: [T]ransfer means (A) the creation of a lien; (B) the retention of title as a security interest; (C) the foreclosure of a debtor s equity of redemption; or 12

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property. Property of the estate is also broadly defined. Such property includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. 541(a)(1). Property of the estate includes only the debtor s equity in the property. After Commencement Of The Case means that a voluntary case, a joint case, or an involuntary case that is commenced by filing a bankruptcy petition. 11 U.S.C. 301, 302 & 303. The commencement of the case is generally straightforward. However, sometimes there are disputes and uncertainty as to when the transfer took place, such as when whether a transfer takes place when a check is delivered or when it is honored. A trustee may generally avoid a postpetition transfer of estate property unless the transfer is authorized by the Bankruptcy Code or the bankruptcy court. Court authorization may include a 363 sale, a 554 abandonment, or by the debtor exempting property under 522(b), granting relief from stay under 362(d) to permit a secured creditor to foreclose its collateral, and dispositions of property in the ordinary course of business, without notice or a hearing, pursuant to 363(c)(1). Exceptions: There are certain exceptions to avoidance of postpetition transfers. 13

1. Gap Transfers in Involuntary Bankruptcies 11 U.S.C. 549(b) protects gap transfers in an involuntary bankruptcy. 11 U.S.C. 549(b) states: In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has. Section 549(b) protects involuntary gap transferees to the extent of any value (including services, but not including satisfaction of a debt that arose before the commencement of the case), given after commencement in exchange for the transfer. Notice or knowledge of the transferee is irrelevant in determining whether he is protected under this provision. 2. Good Faith Purchasers 11 U.S.C. 549(c) states: The trustee may not avoid under subsection (a) of this section a transfer of real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of such real property may be recorded to perfect such transfer, before such transfer is so 14

perfected that a bona fide purchaser of such property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to the interest of such good faith purchaser. A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected. Under the good faith purchaser defense set forth in section 549(c), the trustee may not avoid transfers of real estate to good faith purchasers for present fair equivalent value and without knowledge of the commencement of the case, if a copy or notice of the petition has not been filed in the recording office of the same county where the property is located. If a good faith purchaser has given less than present fair equivalent value, that good faith purchaser is nevertheless entitled to receive protection in the form of a lien to the extent of any present value given. In determining good faith, courts consider whether the transaction carries the earmarks of an arms-length bargain. Courts are split on whether a good faith purchaser who derives title based on an involuntary transfer (such as a foreclosure) which violated the automatic stay is entitled to the good faith purchaser defense. 3. Statute Of Limitations 11 U.S.C. 549(d) states: 15

An action or proceeding under this section may not be commenced after the earlier of-- (1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed or dismissed. However, some courts will grant a trustee relief from the statute of limitations under the doctrine of equitable tolling. The following elements are required to be established by the party seeking the equitable tolling: 1) a wrongful concealment by the defendant, 2) failure of the plaintiff to discover the concealed facts within the limitation period; and 3) the plaintiff s due diligence to discover the facts. Courts are split on whether a trustee is entitled to equitable tolling of the statute of limitations where the trustee is seeking to avoid a transfer against the transferee and there was wrongful concealment by a debtor, but not by the transferee. V. Removing Property from the Bankruptcy Estate. A. Exemptions. The most common method of removing property from the bankruptcy estate is exemption. The types of property exempt from the bankruptcy estate are listed in 11 U.S.C. 522(b). (b) (1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection. In joint cases filed under section 302 of this title and individual cases filed under 16

section 301 or 303 of this title by or against debtors who are husband and wife, and whose estates are ordered to be jointly administered under Rule 1015(b) of the Federal Rules of Bankruptcy Procedure, one debtor may not elect to exempt property listed in paragraph (2) and the other debtor elect to exempt property listed in paragraph (3) of this subsection. If the parties cannot agree on the alternative to be elected, they shall be deemed to elect paragraph (2), where such election is permitted under the law of the jurisdiction where the case is filed. (2) Property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize. (3) Property listed in this paragraph is (A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor s domicile has not been located in a single State for such 730-day period, the place in which the debtor s domicile was located for 180 days immediately preceding the 730-day 17

period or for a longer portion of such 180-day period than in any other place; (B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law; and (C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986. If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d). (4) For purposes of paragraph (3)(C) and subsection (d)(12), the following shall apply: (A) If the retirement funds are in a retirement fund that has received a favorable determination under section 7805 of the Internal Revenue Code of 1986, and that determination is in effect as of the date of the filing of the petition in a case under 18

this title, those funds shall be presumed to be exempt from the estate. (B) If the retirement funds are in a retirement fund that has not received a favorable determination under such section 7805, those funds are exempt from the estate if the debtor demonstrates that (i) no prior determination to the contrary has been made by a court or the Internal Revenue Service; and (ii) (I) the retirement fund is in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986; or (II) the retirement fund fails to be in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986 and the debtor is not materially responsible for that failure. (C) A direct transfer of retirement funds from 1 fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986, under section 401(a)(31) of the Internal Revenue Code of 1986, or otherwise, shall not cease to qualify for 19

exemption under paragraph (3)(C) or subsection (d)(12) by reason of such direct transfer. (D) (i) Any distribution that qualifies as an eligible rollover distribution within the meaning of section 402(c) of the Internal Revenue Code of 1986 or that is described in clause (ii) shall not cease to qualify for exemption under paragraph (3)(C) or subsection (d)(12) by reason of such distribution. (ii) A distribution described in this clause is an amount that (I) has been distributed from a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986; and (II) to the extent allowed by law, is deposited in such a fund or account not later than 60 days after the distribution of such amount. Under paragraph (2)(A), a state may opt out of these exemptions and establish its own exemption laws. B. Homestead Exemption. The debtor s homestead is exempt from creditors 20

claims in bankruptcy, under the state or federal exemption as elected by the debtor. If the real property is claimed as exempt, and no creditors object within the statutory time period, the clerk of bankruptcy court will issue a certificate of property claimed as exempt to the debtor. When recorded, a certificate of property claimed as exempt documents that the debtor has effectively removed the homestead from the estate. Unfortunately, complex legal descriptions are often wrong in the debtors schedules. In addition, because bankruptcy debtors are frequently insolvent, they often cannot afford to pay the fee for the certificate of property claimed as exempt at the time of bankruptcy. For really old files not indexed electronically, the bankruptcy court file may be archived in Chicago when the debtor attempts to sell or re-finance, resulting in a delay in obtaining the certificate of property claimed as exempt. The certificate must be recorded in the real estate records to evidence the removal of the realty from the bankruptcy estate by exemption. C. Abandonment by the trustee. If the property is non-exempt but over encumbered by mortgages, the trustee will not attempt to sell the property and may be willing to issue a certificate of abandonment upon request for a nominal fee. If the property is correctly scheduled in the bankruptcy, but is not the debtor s homestead and the property is fully encumbered with valid liens (typically mortgages) the trustee can be asked to abandon the property back to the debtor. The trustee, if it agrees there is no significant equity in the property, can issue a certificate of abandonment. The certificate can be recorded in the real estate records to evidence the abandonment of the property from the bankruptcy estate. 21

D. Sale by trustee. If the property is not exempt, a commercial property or a lake cabin for example, and there is sufficient equity, the bankruptcy trustee has the ability to sell the property, distribute the net proceeds to unsecured creditors and take a commission on the sale. Sale by the trustee is not common, because most debtors have borrowed against as much of their equity as possible before filing bankruptcy. E. Stay Relief Motion. Under the automatic stay, any mortgage foreclosure must stop. A creditor must ask the bankruptcy court to allow the foreclosure to proceed by seeking relief from the automatic stay. If the court grants stay relief, the creditor records the stay relief order in the real estate records and proceeds with the foreclosure. Elements are in 11 U.S.C. 362. Most common basics used by lenders who seek to foreclose the mortgage is 362(d)(1) and (2). Lack of adequate protection or if the property lacks equity and the property is not necessary for an effective reorganization. Local Rule 9013-3(a) requires that you give notice of your motion to anyone with an interest in the property (not just those that are involved in the bankruptcy proceeding). F. Dismissal of bankruptcy. A fifth method of removing property from the estate is dismissal of the bankruptcy. If the debtor fails to file all necessary documentation in the bankruptcy, or fails to comply with a reorganization plan, the bankruptcy court may dismiss the bankruptcy. It is possible to obtain and record a certified copy of the dismissal order to evidence the removal of the property from the bankruptcy estate. G. Closing of the Bankruptcy. If the property was properly scheduled in the bankruptcy petition, and the trustee does not administer the property, the property is 22

deemed abandoned to the debtor when the case is closed. 11 U.S.C. 554(c). When property is abandoned under 11 U.S.C. 554(c) it is returned to the debtor as though the bankruptcy had not occurred. See In re McGowan, 95 B.R. 104, 106 (Bankr. N.D. Iowa 1988) (citing In re Cruseturner, 8 B.R. 581, 591 (Bankr. D. Utah 1981), In re R B Co., Inc. of Bossier, 59 B.R. 43, 45 (Bankr.W.D. La.1986), 4 Colliers on Bankruptcy 55402 (15th Ed.1988)). Normally, abandonments, once completed, are irrevocable. Id. Most courts hold that re-opening a bankruptcy does not nullify the abandonment. In re Abbott, 183 B.R. 198, 200 (9th Cir. B.A.P. 1995). Because the trustee abandons property by simply leaving an asset unadministered at the close of the case, the trustee has a duty to investigate the value to the estate of scheduled property and to decide whether the property should be administered before the closing of the case. In re Nagy, 432 B.R. 564, 568 (Bankr. M.D. La. 2010) (citing In re Tadlock, 338 B.R. 436, 439 (10th Cir. BAP 2006)). Courts usually have departed from the general rule of irrevocability of abandonment only if a debtor concealed the property from the trustee or where the trustee lacks knowledge, or means sufficient to gain knowledge, of the property s existence. Id. at 569 (citing In re Killebrew, 888 F.2d 1516, 1521, fn. 10 (5th Cir. 1989) (citing In re Tarpley, 4 B.R. 145, 146 (Bankr. M.D. Tenn. 1980)). A certified copy of the schedule and the orders discharging the debtor and closing the bankruptcy can be recorded to evidence the abandonment of the property. * Common misconception that discharge eliminates judgments against debtor. VI. Judgments in Bankruptcy. Many debtors have the misimpression that their bankruptcy eliminates judgments 23

against their homestead. The debtors typically are informed of their mistaken impression when they attempt to sell or refinance their homestead. The bankruptcy discharge eliminates any personal obligation to pay debts including mortgage notes and judgments, but it does not automatically eliminate the lien of a judgment. A judgment docketed in the county of the debtor s abstract property homestead remains as much a cloud on the title after a bankruptcy as before, unless the debtor takes action to clear the judgment from the homestead. There are two bankruptcy related methods of clearing judgments from homesteads, lien avoidance and administrative discharge. VII. Curing Mortgage Defaults. Curing a Mortgage Default in a Chapter 13 11 U.S.C. 1322(b)(5), allows a debtor to cure a default on the mortgage on their primary residence within a reasonable period of time through a confirmed plan. The bankruptcy code does not define a reasonable period of time. Some districts have established a presumptive timeline for being reasonable. In the District of Minnesota, that presumption is one year. In order to extend payments of the default past the presumptive timeline, the debtor must prove on a case-by-case basis that more than the presumption is reasonable in her case based on factors such as the debtor s past record of payment, the reason why the default was accrued, the amount of discretionary income available to the debtor, and the debtor s ability to maintain post-petition payments to the mortgagee as they mature. Curing a Mortgage Default in a Chapter 11 24

11 U.S.C. 1123(a)(5)(G) allows a debtor to cure a default through a confirmed reorganization plan. This includes the right to cure a mortgage default. This right to cure a default on a mortgage extends even after an entry of judgment of foreclosure in state court as long as the chapter 11 bankruptcy is commenced prior to the foreclosure sale. Unlike Chapter 13, there is no presumptive timeline for reasonableness for the amount of time to pay back the mortgage arrears through a plan. 25