Bulletin: SLS2010014

Dear Associates:

A common misconception about bankruptcy is that a discharge wipes the debtor's slate clean. It does so only as to the personal liability of the debtor on the underlying discharged debt. In a nutshell, the rule in bankruptcy is that a pre-petition secured lien on real property of the debtor will remain a lien on the property after the bankruptcy is completed unless or until removed by the bankruptcy court. Any order removing a lien should be reviewed by Stewart Underwriting Personnel.

Unless the bankruptcy court does something to affirmatively remove an existing lien from real estate, that lien passes through the bankruptcy case unaffected. As such, the lien creditor can enforce its lien against real property. Once the bankruptcy case is closed, the automatic stay is lifted, and the lien creditor is then free to enforce its lien through foreclosure or execution. It is likely that the debtor has no personal obligation to pay the debt, but the property remains liable "in rem." This rule creates an undesirable choice of having to lose the property to foreclosure, or settle with the lien creditor on a debt for which the client was discharged. However, local laws may allow for satisfaction of the lien through varying methods.

Property acquired after the bankruptcy case may not be encumbered by a pre-petition judgment lien if the debt of the judgment creditor is discharged. See 2.04.12 and 2.04.14.

If you have any questions relating to this or other bulletins, please contact Stewart Legal Services or your local underwriting personnel.

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.