When it comes to real estate transactions, few things cause more last-minute stress than discovering a recorded judgment tied to a property right before closing. Many property owners who have filed for bankruptcy assume that once they receive a discharge from the bankruptcy court, all debts—including judgments—are automatically cleared. Unfortunately, this is not the case.
Let’s break down why this happens and what property owners, agents, and sellers should know to avoid delays and surprises during escrow.
The Difference Between Personal Obligation and Property Liens
Consider this scenario: Mary Smith owes money to Credit Card Company X. She fails to pay, so the company sues and obtains a judgment against her. That judgment is then recorded against her property.
Later, Mary files for bankruptcy and lists Credit Card Company X as a creditor. The bankruptcy court grants her a full discharge, wiping out her personal obligation to pay the debt.
Here’s the key point: while the bankruptcy discharge relieves Mary of personal liability for the debt, it does not automatically remove the recorded judgment attached to the property. The lien stays in place until specific legal steps are taken to remove it.
How to Properly Remove a Judgment After Bankruptcy
To free the property from the judgment, the bankruptcy court must issue an Order to Avoid Lien for that specific judgment. Without this order, the lien remains attached to the property, even though the personal debt is no longer owed.
If there is no Order to Avoid Lien on record, the property owner—or their attorney—will need to either:
- Request the bankruptcy court to issue the order retroactively, or
- Negotiate directly with the judgment holder for a release before closing.
Why This Matters in Real Estate Transactions
These judgment issues often surface when the title company reviews the property in preparation for closing. If judgments remain unresolved, they can prevent the transfer of a clear title, leading to delays or even jeopardizing the sale altogether.
As a real estate professional or property owner, it’s essential to:
- Ask for a copy of the Order to Avoid Lien early in the process if the seller has gone through bankruptcy.
- Contact the attorney or bankruptcy court immediately if the order is missing.
- Understand that, without the order, negotiations with the judgment creditor may be necessary.
Final Thoughts
Bankruptcy can eliminate personal debt obligations, but it doesn’t automatically remove recorded judgments from real property. Addressing this issue proactively ensures smooth closings and prevents last-minute surprises.
At Boutique Realty, we guide clients through every step of the real estate process, including helping sellers navigate title and lien challenges. If you’re selling your home, buying a property, or need expert advice on real estate transactions, reach out to our team today. We are here to ensure your real estate journey is seamless and stress-free.