351 Pleasant Street, Suite B-348
Northampton, MA 01060
Whenever I meet with clients I begin my inquiry not by getting a firm grasp of their unsecured debts, but by trying to understand just what the client owns – even if ownership is somewhat in doubt. Bankruptcy — and personal bankruptcy in particular — is all about allowing a person to shed those bad and unsecured debts in order to get a fresh financial start. But shedding those debts comes at a price. The price, in a Chapter 7 case, is the risk of losing some assets. While the vast majority of Chapter 7 bankruptcy cases in Massachusetts are deemed to be no-asset cases, this is not the only possible designation. It is very important to get a full understanding of all the potential risks before filing your Chapter 7 bankruptcy case, because once you are in, you do not have a right to withdraw the case, particularly in light of the discovery of assets that may be subject to liquidation.
One prime area for liquidation of assets is real estate. While exemptions may be able to protect equity (at least perceived equity) there are always traps for the unwary. In some cases, the unwary one might not be the debtor, but another party who expects her property interests to be safe in the debtor’s bankruptcy.
As I have discussed in this space before, Trustees in bankruptcy have many powers, including the power to liquidate things that the Debtor might not be able to outside of bankruptcy. In 2009, a Chapter 7 trustee in Massachusetts famously set aside a mortgage held by Countrywide Home Loans* due to an improperly completed notary clause! In that case the Trustee turned a $282,782.40 secured debt, into an asset for the bankruptcy estate worth the same amount.
While mortgage lenders are equipped with a plethora of lawyers to help them navigate costly mistakes like those in the case above, what happens when an individual has an interest in real estate that is not properly recorded with the Registry of Deeds? Recently, another trustee in Massachusetts set aside a transfer between spouses as part of a divorce judgment.** In that case a debtor was divorced several years before the bankruptcy case. In his divorce, the Probate and Family Court entered judgment under which the debtor’s former spouse was granted ownership in certain real estate. Pursuant to the judgment, the former spouse was permitted to record either a deed or a copy of the divorce judgment as proof that title to the property was vested solely in her. The former spouse, however, failed to record either document with the registry of deeds. When her ex-husband was in bankruptcy some years later, the Ch. 7 trustee sought to sell the former spouse’s property for the benefit of the bankruptcy estate.
Typically, a bankruptcy trustee has the power to avoid transfers where a bona fide purchaser could purchase the property without notice of an intervening transfer. The former spouse argued that the trustee’s avoidance power as a bona fide purchaser without notice did not apply since a purchaser would be led to a review of not only the records held in the registry of deeds, but also the probate records which contained the divorce judgment. The former spouse also argued that her exclusive possession and control of the property also put the Trustee or another buyer on notice.
Despite the former spouse’s argument, the bankruptcy court determined that the transfer of the property set forth in the divorce judgment could be avoided, allowing the Trustee to sell the property. The court specifically held that the probate court records were not equivalent to those of the registry of deeds for the purpose of putting prospective buyers on notice.
While this decision has yet to be affirmed by a higher court, and it is only one bankruptcy judge in Massachusetts that has thus far decided a case in this way, the warning is now clear. It is important that all expected ownership interests (or transfers) in real estate be properly recorded in order to assure that the assets are not liquidated by a trustee in bankruptcy.
It is vitally important that potential debtors in any bankruptcy case work with an experienced bankruptcy attorney before filing a bankruptcy petition. It may be equally important for a potential debtor’s former spouse or someone who co-owns property with the potential debtor to understand the significance of a filing and how they may be able to protect themselves. To schedule a free consultation call the Law Offices of James Wingfield at 508-797-0200 or visit the contact page of our website today.
*See Agin v. Mortgage Electronic Registrations Systems, Inc. et al (In re Giroux), Bankr. No. 08-14708, Adv. No. 08-1261, 2009 WL 1458173 (Bankr. D. Mass. May 21 2009), affirmed by Mortgage Electronic Registration Systems, Inc. v. Agin, No. 09-CV-10988, 2009 WL 3834002 (D. Mass. November 17, 2009).
**See Baldiga v. Golemo (In re Golemo), 494 B.R. 588 (Bankr. D. Mass. 2013).
The Law Offices of James Wingfield is proud to be a debt relief agency. We help the individuals, families and small businesses of the Worcester area file for bankruptcy relief under the United States Bankruptcy Code. The Law Offices of James Wingfield serves Central and Western Massachusetts clients in Worcester County, Hampden County, Hampshire County and Middlesex County including Worcester, Shrewsbury, Springfield, Westborough, Southborough, Framingham, Northampton, Natick, Amherst, Fitchburg, Leomister, Douglas, Uxbridge, Gardner, Belchertown, Holyoke, Wilbraham and Chicopee. The information contained and obtained in this website does not, nor is it intended to be, legal advice. Contacting us, be it through this website, via email of by telephone does not create an attorney-client relationship. An attorney-client relationship is only created upon execution of an engagement agreement or fee agreement.
[…] gives notice to all people that there is priority to the lender (i.e., the Mortgagee). If it is not properly recorded, it is still valid, but in bankruptcy the Trustee may be able to avoid the mortgage for the benefit […]