In most instances outstanding judgments will be resolved (i) by supplying the title company with an affidavit that the judgment debtor is not the selling party; (ii) by obtaining a Satisfaction of Judgment for previously satisfied debts for which a Satisfaction was never filed with the County Clerk; (iii) if the title company permits, by depositing 2x the face amount of the judgment in escrow pending clearance by Seller. In other instances the judgment will either be settled or paid in full with interest at the time of closing. But there is another way to dispose of judgments affecting title.
In New York, a debtor that files bankruptcy is entitled to claim a New York homestead exemption of up to $170,825 (as of August 2019) if they live in the metropolitan area. For a married couple the combined homestead exemption is twice that, $341,650. Essentially, if there is not enough money to pay an owner’s full homestead exemption after deduction of consensual liens, such as mortgages, and statutory tax liens from the fair market value of the property at the time of the bankruptcy filing, the lien(s) can be “avoided” in full or part depending on the math.
For example if a person owns a house that is worth $150,000 and there are $250,000 of judgment liens against the house, the judgment liens are avoided in full. If the house is worth $250,000 the judgment liens will be reduced to $79,175 (assuming an individual filed bankruptcy and not a married couple). The judgment liens are avoided according to the date of docketing of their judgment. The judgment first in time gets paid first and, if there is enough to pay the first judgment, the second judgment gets paid etc. until no money is left. The analysis and determination of one’s equity in the property can become more complicated where the property is owned by more than one person and there are judgments against the interest of only one of the owners.
If faced with this situation it will be necessary to make a motion in the bankruptcy court to have the bankruptcy case re-opened for the purpose of vacating judgment liens that impair debtor’s homestead exemption. The prior bankruptcy papers will need to be reviewed to make sure that the debtor is entitled to the homestead exemption. The debtor may have taken exemptions in other property that may limit or negate the ability to void the judgment(s).
Courts have generally been fairly liberal in granting motions to re-open bankruptcy cases for the purpose of making a motion to claim a homestead exemption that was not taken and/or to seek to avoid judgments that impair the homestead exemption even where the homestead exemption was taken. Often times the debtor is not informed of the ability to void the judgment at the time of the bankruptcy filing or the client does not want to pay the added expense of making the motion. Bankruptcy cases filed 10 years past have been opened for the purpose of avoiding judgment liens.
In making the motion the attorney will need to review the prior bankruptcy filing and obtain (i) a lien search; (ii) a valuation/appraisal of the property at the time of the bankruptcy filing; (iii) mortgage statements and/or tax notices showing balances due on the bankruptcy filing date; (iv) amounts owed on each judgment on the filing date, etc.
More than one real estate closing has been held up or completely aborted because of judgment liens. This strategy might just save that closing in the right circumstances.