Liens against real property that have not been recorded or were not timely recorded, can be avoided by a Chapter 7 trustee and present a dilemma for a debtor. See 11 USC 544 and 11 USC 547(e)(2)(B). Once a case is filed, the trustee can assert power over the property of the estate. This means, if the property has an unperfected lien, the trustee can stand in the shoes of a bona fide purchaser and avoid any transfer, lien, or encumbrance that was not enforceable at the time the bankruptcy case was filed. The debtor then faces the decision to continue to make mortgage payments or wait for the conclusion of the trustee’s adversary lawsuit to avoid the unrecorded lien. If the trustee prevails, the debtor could be in the position of having more equity in the property than he or she can protect.

Depending on who was responsible for failing to record the mortgage, a debtor may obtain relief through a settlement with the trustee. If a debtor is able to obtain new financing, the debtor may be able to purchase the trustee’s interest in the property for less than was originally owed. At the same time, the mortgagee can offer to settle with the trustee to preserve the lien. If this occurs, the trustee is likely to settle for the highest offer. In order to avoid this hassle, it is critical that all liens are carefully reviewed prior to filing a bankruptcy petition.

- Richard V. Stokan, Jr.