Selling a Property in Foreclosure and Chapter 13 Bankruptcy

What Must Be Done to Deliver Clear and Marketable Title to the Buyer

By Christopher Brown

Title Officer & Chief Executive OfficerClosePoint USA LLC

A property in foreclosure can still be sold. A property involved in Chapter 13 bankruptcy can also be sold. However, when a property is subject to both foreclosure and bankruptcy, there are additional legal and title requirements that must be satisfied before the transaction can close.

As a Title Officer and Title Examiner, my responsibility is to identify liens, judgments, mortgages, foreclosure proceedings, and other encumbrances affecting the property and determine what is required to deliver clear and marketable title to the purchaser.

A signed real estate contract does not automatically authorize a seller in bankruptcy to complete a sale, nor does it guarantee that the property can be transferred free of existing liens and encumbrances.

At ClosePoint USA LLC, our role is to identify title issues, establish the requirements necessary to resolve them, and coordinate the settlement process so the buyer receives the title contemplated by the contract.

When foreclosure and Chapter 13 bankruptcy are involved, the following are among the most important requirements we examine before closing.

1. A Bankruptcy Court Order Authorizing the Sale

When a seller is involved in an active Chapter 13 bankruptcy proceeding, the first document we request is the applicable Bankruptcy Court Order authorizing the sale of the property.

The seller’s bankruptcy attorney is responsible for determining the required bankruptcy procedure, filing the appropriate Motion to Sell Real Property, and obtaining the necessary court approval.

The motion should identify the property, purchaser, purchase price, and material terms of the contract.

From a title examination and settlement perspective, we need to confirm that the entered order authorizes the transaction under the terms and conditions that will appear on the final settlement statement.

The order must provide sufficient authority for the seller to convey the property and for the settlement agent to make the required disbursements.

We review the order carefully because an authorization to sell does not necessarily eliminate existing liens or resolve every financial obligation associated with the property.

2. The Court Order Must Address the Seller’s Closing Expenses

One of the most important parts of our review is comparing the Bankruptcy Court Order with the proposed Closing Disclosure and ALTA Settlement Statement.

We need to establish that all applicable seller charges and distributions are authorized under the order, other applicable court approvals, or governing law.

These may include:

• Real Estate Commissions: The complete commissions payable to both the listing brokerage and the buyer’s brokerage, with accurate dollar amounts.

• Attorney Fees: Seller closing attorney fees, bankruptcy attorney fees, and any professional compensation requiring separate Bankruptcy Court approval.

• Title and Settlement Charges: Ordinary title examination, settlement, payoff, and other applicable title-related expenses.

• Realty Transfer Fees: New Jersey Realty Transfer Fee and other applicable transfer-related taxes or fees.

• Recording Costs: Applicable document recording, discharge, and related charges.

• Seller Credits: Contractual seller concessions, repair credits, and other negotiated adjustments.

• Property Expenses: Outstanding real estate taxes, municipal charges, water and sewer balances, and applicable association charges.

• Mortgage and Lien Payoffs: Amounts required to satisfy secured creditors and other liens affecting the property.

• Distribution of Sale Proceeds: Instructions governing payments to the Chapter 13 Trustee, the debtor, and any other court-authorized recipients.

For example, if the Bankruptcy Court Order authorizes $35,000 in real estate commissions but the final settlement statement reflects $55,000, we have identified a discrepancy that must be resolved.

We cannot simply assume the additional commission is authorized.

The bankruptcy attorney may need to obtain an amended or clarifying order before the transaction can proceed as proposed.

Our objective is to identify these discrepancies before closing, not at the closing table.

3. We Must Know What Happens to the Seller’s Proceeds

In a Chapter 13 bankruptcy, the seller’s equity may be subject to the requirements of the bankruptcy repayment plan.

From a settlement perspective, we need clear written instructions identifying who is legally entitled to receive the proceeds and in what amounts.

We require confirmation, as applicable, of:

• The amount necessary to satisfy the remaining Chapter 13 Plan obligations.

• The amount payable to the Chapter 13 Trustee.

• Any debtor exemption authorized by the Bankruptcy Court.

• Any amounts payable to bankruptcy counsel under an applicable court order.

• Whether remaining proceeds may be distributed to the seller.

• Any other restrictions or conditions imposed by the Bankruptcy Court.

These instructions must be consistent with the entered order and any subsequent court directives.

A seller’s equity is not necessarily the same as the amount the seller is entitled to receive at closing.

The settlement agent must have a proper basis for distributing the proceeds.

4. A Complete Foreclosure Mortgage Payoff Is Required

When a property is in foreclosure, obtaining a mortgage payoff is one of the most critical steps in clearing title.

An estimated mortgage balance, online account balance, or statement showing only unpaid principal is not sufficient.

We require a current, written payoff from the foreclosing lender or its authorized servicer that identifies the full amount necessary to satisfy the mortgage obligation.

The payoff must account for all applicable charges, including:

• Outstanding principal.

• Accrued interest through the payoff date.

• Daily interest for any additional days.

• Late charges and authorized servicing fees.

• Foreclosure attorney fees and court costs.

• Real estate taxes advanced by the lender.

• Homeowners insurance premiums advanced by the lender.

• Authorized property preservation and inspection expenses.

• Other amounts properly due under the loan documents and applicable law.

The payoff must also identify the correct creditor or authorized servicer, the payoff expiration date, and the required payment instructions.

The Payoff Must Address the Mortgage Satisfaction and Foreclosure Lis Pendens

This is particularly important.

We need written confirmation that payment of the required amount will result in satisfaction or discharge of the mortgage of record.

We must also establish how the pending foreclosure action and any recorded Notice of Lis Pendens will be dismissed, canceled, discharged, or otherwise cleared.

A mortgage satisfaction and a discharge of the foreclosure lis pendens are separate title considerations.

The title examiner must determine what documentation and procedures are necessary to clear both.

Our requirement is straightforward: We must establish that the foreclosing mortgage and related foreclosure encumbrances can be properly removed from the title.

5. We Examine the Status of the Foreclosure Proceedings

Not every foreclosure is at the same stage.

Before closing, we examine the available foreclosure records to determine whether:

• A foreclosure complaint has been filed.

• A Notice of Lis Pendens has been recorded.

• A Final Judgment of Foreclosure has been entered.

• A Writ of Execution has been issued.

• A Sheriff’s Sale has been scheduled.

• A Sheriff’s Sale has occurred.

These distinctions are important because they may affect the seller’s ability to convey title and the procedures necessary to resolve the foreclosure.

When a property is also in bankruptcy, we must review the applicable Bankruptcy Court orders and determine whether additional documentation is necessary concerning the foreclosure proceeding.

The seller’s attorneys are responsible for obtaining the required legal relief and resolving court-related issues.

Our responsibility is to identify the resulting title requirements and confirm that they have been satisfied.

6. All Other Judgments and Liens Must Be Resolved

The foreclosure mortgage is not necessarily the only encumbrance affecting the property.

Our title examination may identify additional matters, including:

• Other recorded mortgages.

• Superior Court judgments.

• Federal and state tax liens.

• Child support judgments.

• Municipal liens.

• Condominium or homeowners association liens.

• Other recorded claims or encumbrances.

Each matter must be examined to determine its effect on the property and what is necessary to remove it or otherwise establish insurable title.

A seller’s statement that a judgment was paid years earlier does not, by itself, establish that the judgment has been discharged of record.

Likewise, a prior owner’s title insurance policy does not automatically eliminate an outstanding lien.

The title examiner must determine whether the encumbrance remains enforceable against the property and identify the documentation or other acceptable basis necessary to clear the title issue.

Our responsibility is not simply to identify liens. It is to establish what must be done to resolve them so that the buyer can receive clear and marketable title.

7. The Bankruptcy Order, Title Commitment, and Settlement Statement Must Agree

Before closing, we compare three essential documents:

The Bankruptcy Court Order: Establishes the applicable authority to sell and governs authorized payments and distributions.

The Title Commitment: Identifies the title requirements, liens, judgments, and other matters that must be addressed before the required title insurance can be issued.

The Closing Disclosure and ALTA Settlement Statement: Identify the actual financial terms of the transaction, including mortgage payoffs, commissions, expenses, credits, and distributions.

These documents must be consistent.

If the Bankruptcy Court Order authorizes one commission amount but the settlement statement reflects another, the discrepancy must be resolved.

If the title commitment identifies a mortgage or judgment, we must establish how that encumbrance will be cleared.

If the settlement statement directs proceeds to the seller but the Bankruptcy Court requires payment to the Chapter 13 Trustee, the proposed distribution must be corrected.

This reconciliation is a critical part of preparing a transaction for closing.

8. What We Need From Each Party

From the Seller

We need full disclosure of the bankruptcy and foreclosure proceedings, including the bankruptcy case information, mortgage servicer details, and relevant court documents.

The seller must cooperate with the attorneys and provide authorizations and documentation necessary to obtain the required mortgage and lien payoffs.

From the Realtor

We need the fully executed purchase contract, all amendments, accurate brokerage commission information, and every seller credit or concession.

The Realtor should promptly notify the title company when the seller is involved in bankruptcy or foreclosure.

Any changes to commissions, purchase price, or seller credits must be communicated to bankruptcy counsel because they may affect the required court authorization.

From the Seller’s Bankruptcy Attorney

We need the entered Bankruptcy Court Order authorizing the sale and any amendments or related orders necessary to complete the transaction.

We also need written confirmation of the Chapter 13 Trustee’s payment requirements, authorized seller distributions, and any applicable professional compensation requirements.

From the Seller’s Closing Attorney

We need assistance obtaining the required foreclosure payoff, resolving outstanding liens and judgments, and coordinating the documents necessary to clear the foreclosure proceeding.

The attorney must also address any legal issues affecting the seller’s authority to convey the property.

From the Buyer and Buyer’s Attorney

We need timely cooperation with the transaction requirements and confirmation of any contractual changes affecting the closing.

The buyer and buyer’s attorney should understand that the seller’s bankruptcy and foreclosure may create additional documentation requirements and affect the closing schedule.

Our objective is to resolve the title requirements before the buyer completes the purchase.

9. Our Title Examination Checklist Before Closing

Before we can complete the transaction, the following matters must be reviewed and satisfactorily addressed, as applicable:

☐ Fully executed purchase contract and amendments received.

☐ Bankruptcy case and applicable court orders reviewed.

☐ Entered Bankruptcy Court Order authorizes the proposed sale.

☐ Brokerage commissions and seller expenses reconciled with the court authorization.

☐ Chapter 13 Trustee payment and distribution instructions confirmed.

☐ Current, complete foreclosure mortgage payoff received and verified.

☐ Mortgage satisfaction requirements established.

☐ Foreclosure lis pendens and court disposition requirements established.

☐ Foreclosure judgment and Sheriff’s Sale status reviewed.

☐ All additional mortgages, judgments, and liens examined and addressed.

☐ Realty transfer fees, recording costs, taxes, and seller credits confirmed.

☐ Title commitment requirements satisfied.

☐ Closing Disclosure and ALTA Settlement Statement reconciled with the applicable orders and title requirements.

☐ Closing funds and disbursement instructions verified through approved secure procedures.

10. The Key to a Successful Closing Is Early Title Review

The most avoidable problems in foreclosure and bankruptcy transactions occur when the title company receives critical information too late.

A missing court authorization, an incorrect commission amount, an incomplete foreclosure payoff, or an unresolved judgment can prevent a transaction from closing as scheduled.

The best approach is to involve the title company as early as possible.

At ClosePoint USA LLC, we encourage Realtors and attorneys to provide the bankruptcy information, foreclosure details, and purchase contract as soon as the property is under contract.

That allows our title examination and settlement teams to identify the necessary requirements, communicate them to the appropriate parties, and work toward resolving them before closing.

A property in foreclosure and Chapter 13 bankruptcy can be successfully sold. The key is obtaining the necessary court authority, resolving the outstanding liens and encumbrances, and ensuring that clear and marketable title can be delivered to the buyer.

That is the responsibility we take seriously at ClosePoint USA LLC.

Christopher Brown Title Officer & Chief Executive Officer ClosePoint USA LLC Licensed Title & Settlement Services New Jersey, Pennsylvania & Florida

Important Disclaimer

ClosePoint USA LLC, any affiliated or participating title insurance agency, and the settlement agent act solely in their respective capacities as title examination, title insurance, and settlement service providers.

Neither the title agency, title company, nor settlement agent represents the legal interests of the buyer, seller, Realtor, lender, debtor, creditor, or any other party to the transaction.

Our role is to examine the public records and other relevant title documentation, identify mortgages, judgments, liens, and other title encumbrances, establish the requirements necessary to resolve title defects, and facilitate the delivery of clear, marketable, and insurable title to the purchaser in accordance with the applicable transaction documents and title insurance requirements.

We do not act as legal counsel, provide bankruptcy or foreclosure legal advice, represent parties in court proceedings, or determine their respective legal rights and obligations.

Each party should consult independent legal counsel regarding the interpretation of Bankruptcy Court orders, foreclosure proceedings, contractual obligations, creditor rights, and the distribution of sale proceeds.

This publication is provided for general educational purposes, primarily concerning New Jersey real estate transactions, and does not constitute legal advice or establish an attorney-client relationship.