JUDGMENT LIENS AND BANKRUPTCY: HOW THEY CAN AFFECT YOUR CLOSING
By: David Berman, Esq. of Barry L. Miller, P.A., Offices Orlando.
So, you have had the misfortune of having judgment liens recorded, in the public record, against you and have filed bankruptcy to discharge the debt. That may just be the beginning of your troubles. If proper steps are not taken, those liens could impact the future sale of your home. If that home is your Florida constitutional homestead, you may be able to avoid the judgments, but proper steps must be taken.
Suppose you have judgment liens recorded against you from failed business dealings which you personally guaranteed. Now suppose you go to sell your home, which is your homestead property. You get a title commitment showing the requirements that must be satisfied to provide clear title to the buyer. On that commitment will be requirements to satisfy or have released those judgments recorded in the Official Records of your county. But wait, you paid a bankruptcy attorney a lot of money and you went through bankruptcy to have all your debts wiped clean. You thought you were cleared from those judgments and could close on the sale of your home.
While bankruptcy may protect you in some respects and give you a fresh start, when it comes to issuing clear title there are important steps that must be taken to ensure you can provide clear title to your homestead property. The bankruptcy proceeding may clear you of your debt obligations, but as long as a judgment remains in the public records, it’s satisfaction or release is a requirement to close on the sale of your home. The judgment lien is similar to a mortgage in this respect; it requires satisfaction or release in order provide along clear title.
You may be wondering how you get your homestead property clear of these judgment liens in order to sell your home. Depending on the amount of the judgments, an underwriter might accept a simple owner’s affidavit declaring the property your constitutional homestead and thus protected from the judgment lien creditors. However, suppose in the example above the business failed spectacularly and you have over a million dollars in judgment liens recorded against you. It is unlikely an underwriter will accept a simple owner’s affidavit.
In this scenario, you have two options to avoid the judgment liens and proceed with the sale of your home. The first is through the bankruptcy proceeding itself. An order to avoid judicial liens on exempt property (i.e., homestead property) may be sought. Now, you may think your bankruptcy attorney would do this automatically because they are representing you and they are keeping your best interests in mind including the possibility that you will sell your home, but that is not usually the case. Often times bankruptcy attorneys do just what is necessary to have debts discharged, but they do not always consider the future ramifications of the judgments already recorded and they do not take the additional steps necessary to avoid the judgments liens.
An analogy would be when a couple gets divorced and the court orders Spouse One to convey their interest in the marital home to Spouse Two as part of the marital settlement. However, often times a quit claim deed is not prepared and executed at the time of the marital dissolution, so when Spouse Two who received the property from the marital settlement attempts to sell the house, they must go back to Spouse One to have the proper conveyances executed. You can see how this could pose a challenge if the spouses are not on good terms, and this would have been an easily avoided problem if the attorney handling the dissolution had followed through at the time of the dissolution and had the proper conveyance executed ensuring title was in Spouse Two’s name only. Dutiful bankruptcy attorneys will follow through and file the requisite motions and orders to have any judicial liens on exempt property avoided, so that their client can sell their homestead in the future without worrying about the judgment liens.
A second way to avoid a judgment lien from impairing the sale of your homestead property is available through Florida Statutes. Known as designation of homestead by owner before levy, § 222.01, Florida Statutes, provides a method for a homeowner to avail themselves of the benefit of the provisions of the constitution and laws exempting property as homestead and the protection from forced sale of the home to satisfy creditors that comes with said homestead designation.
Either of the methods mentioned above take time. The bankruptcy method has among others, a twenty-one (21) day negative waiting period. The § 222.01, Fla. Stat. method has a forty-five (45) day creditor response period. Often a seller does not address these concerns prior to the sale of their property, only to find out the requirements to satisfy or release the judgment liens cannot be accomplished before the proposed closing date. Therefore, it is imperative for a homeowner who has judgment liens recorded against them who is considering selling their homestead property to seek legal advice as soon as possible.
The homestead protection discussed in this article does not protect homestead property from all creditors and all judicial liens, which is why is it important to have a knowledgeable real estate lawyer working for you. Barry Miller Law is familiar with all aspects of real estate title. If you, or someone you know, has legal questions concerning real estate, contact Barry Miller Law for assistance at 407-423-1700 or email us at [email protected] for a free consultation.