A “wolf pit” is a conical hole, concealed under a layer of soil, with a sharpened stake hammered at the bottom. It is best avoided. Bankruptcy poses certain pitfalls to the title insurer, also best avoided. Learn to Identify and steer clear.
The most common pitfalls are 1. an open bankruptcy, 2. a violation of the automatic stay, 3. a prior fraudulent and/or preferential transfer, 4. failure to record a mortgage within 30 days, and 5. the assumption that a discharge in bankruptcy removes liens and judgments from the debtor’s real property.
A bankruptcy is generally commenced with the debtor filing a petition listing all assets and creditors. Filing puts all debtor’s property, whether or not listed, under the control of the Trustee in Bankruptcy. After filing, neither the debtor, nor her creditors, can reach her property.
Title may not be insured until the case is closed (a discharge is not sufficient), or there is a court order to sell. However, even with an order, you must wait until the appeal period has expired, without an appeal having been filed. (Consult with underwriting counsel when the bankruptcy is a Chapter 13). This applies even where only one spouse has filed and title is held as tenants by the entirety. It also applies to property that the debtor did not schedule as an asset, or property inherited during the pendency of the bankruptcy.
Violation of Automatic Stay
Filing a petition triggers an automatic stay, which bars creditors from enforcing their liens against debtor’s property until the case is closed or the automatic stay lifted. In a foreclosure, actions taken in violation of the automatic stay are generally void ab initio. Therefore title coming through a foreclosure, where proceedings were had in violation of the automatic stay, may not be insurable.
Gift transfers, Fraudulent Conveyances, Preferential Transfers
A fraudulent transfer is one made for inadequate or no consideration, either with the intent to defraud (actual fraud), or which rendered the grantor insolvent (constructive fraud). A preferential transfer is made by a debtor, prior to filing for bankruptcy, which gave a preference to one creditor over another. A deed by a settlor to his living trust, a deed given to one’s children, reserving a life estate, a deed between spouses, all are vulnerable to being avoided by the trustee as fraudulent transfers. Deeds in lieu are an example of transfers which can be both preferential and fraudulent and which also can be avoided by the trustee. In New York, a trustee can challenge a fraudulent conveyance for six years from the transfer, and a preferential transfer made 90 days prior to filing, unless the transferee was an insider, in which case there is a one year statute of limitations.
Failure to record a mortgage within 30 days
A trustee can avoid a mortgage which was not timely recorded.
Judgments are not automatically removed as liens against real property as a result of debtor’s discharge. The debtor will no longer have personal liability for the judgment, but the creditor will retain a lien against her real property, except in those rare instances where there is an order returning the bankruptcy estate to the debtor “free and clear”. In such a case, only those debts which were scheduled will be removed as liens. Always discuss “free and clear’ orders with underwriting counsel, and notwithstanding the court order, never omit open real property taxes