Bulletin: WI2010004

Dear Associates:

Many people are under the impression that when a debtor goes through a bankruptcy, all judgments against the debtor can be ignored after the debtor is discharged. In Wisconsin, for judgments that became liens on real estate prior to the bankruptcy filing, this is not the case. The bankruptcy discharge releases the debtor from any personal obligation to pay for a particular debt, as long as the debt was listed in the debtor's bankruptcy schedules. The judgment lien against the debtor's property continues to exist until released. The judgment will not, however, become a lien on any property the debtor acquires after discharge.

The following is an actual Wisconsin example. In 1986, a client signed a promissory note secured by a first mortgage on nonresidential property to bank. Client filed for bankruptcy protection in 1989. Bank was listed as a creditor in the bankruptcy schedules, and the debt was discharged by the bankruptcy court in 1990. In May of 2001, the bank initiated foreclosure proceedings on the mortgage. Debtor's counsel raised the following question (among others): Can the lien of the mortgage that wasn't avoidable under section 522(f) still be foreclosed even though the underlying debt has been discharged?

The court noted that 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 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.

While this case involved a mortgage lien, it stands for the rule that 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 certainly enforce its lien against real property. Once the debtor's bankruptcy case is closed, the automatic stay is lifted, 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.

In Wisconsin, there is a state court remedy that avoids this unpalatable choice for judgment liens. Wis. Stat. §806.19(4) permits a debtor of a discharged debt to secure a judicial satisfaction of the lien by making an application for a satisfaction to the circuit court for the county where the property is located. Copies of the discharge and certain bankruptcy schedules must be attached to the application, and notice of the application for release of the lien must be provided to the creditor. This statute is for judgment liens only and does not permit the avoidance of a mortgage lien.

Please contact your local underwriting personnel for forms that can be used to apply for this judicial satisfaction.

If you have questions related to this bulletin, please contact your local underwriting personnel or Stewart Legal Services.

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