Understanding Lis Pendens in Bankruptcy: Property Rights Explained

Bankruptcy is often used when a person’s debts have become so large that they cannot possibly pay them all. This means that by the time bankruptcy is declared, there have usually been multiple efforts made by creditors to collect the debts owed to them. One of the ways they may go about this is by going after the debtor’s property. When this happens, the creditor may file a lis pendens. 

What Is a Lis Pendens?

In the United States court system, lis pendens is a legal term, which translates as “lawsuit pending”. A lis pendens is filed on a piece of property, usually real estate. It serves as a formal announcement that a pending lawsuit exists that may affect the title or claim to a piece of real estate. In layman’s terms, it acts as a warning to potential buyers of said property, letting them know that the lawsuit’s outcome could impact any interest subject to the dispute, such as ownership or usage rights. Essentially, buying a property with a lis pendens could mean that you won’t actually end up owning the property. Any time an action is filed in court involving the ownership or claim to the land, a lis pendens notice is recorded against the property’s title, available for all to see. 

How Long Is Lis Pendens Valid?

Generally, a lis pendens does not have a set expiration date. Some states do impose a time limit, such as New York, where a lis pendens expires after 3 years. However, in most states, including Pennsylvania, a lis pendens is valid for the duration of the underlying lawsuit. This means that it could be valid for years. When this is the case a lis pendens will only go away under certain circumstances, including:

• Lawsuit Resolution: A lis pendens is tied to the lawsuit that gave rise to it. Once the lawsuit is settled, dismissed, or otherwise resolved (including appeals), the lis pendens is no longer valid. 

• Court Order: The court has the ability to order the dissolution or expungement of a lis pendens. This is usually only done if it’s found to be improperly filed or if the underlying claim is not valid. 

• Withdrawal or Discharge: The person who filed the lis pendens has the ability to voluntarily withdraw it. This will immediately dissolve the lis pendens.

Until one of the above happens, the lis pendens will remain in place, making it extremely difficult for the owner of the property to sell it. 

Lis Pendens FIled Before Bankruptcy

Many people will have had a lis pendens filed on their property before declaring bankruptcy. When bankruptcy occurs, the lis pendens can be affected in a number of different ways, This can include:

• Automatic Stay: When bankruptcy is filed, an automatic stay goes into effect. This prohibits all debt collection efforts from creditors, including lawsuits. This will freeze the state court action involving the lis pendens.

• Bankruptcy Trustee’s Powers: When bankruptcy is filed, the court appoints a bankruptcy trustee to oversee the process. This person has significant powers. In some cases, a trustee can have a lis pendens and the related claim voided, especially if they were recorded shortly before the bankruptcy filing. Specifically, a lis pendens filed within 90 days of a bankruptcy petition may be set aside as an illegal “preferential transfer” to a creditor.

• Protecting a lien: If a creditor properly filed a lis pendens more than 90 days before the bankruptcy petition, it can protect their interest in the property. In some jurisdictions, the bankruptcy court may recognize that the lis pendens put other creditors on notice of the claim, preventing the trustee from treating the property as unencumbered.

As you can see, a lis pendens filed before a bankruptcy will likely be affected by the bankruptcy process. 

What Happens After Lis Pendens Is Filed?

After a lis pendens is filed, it places what is known as a “cloud” on the title of the property. This notifies potential buyers and lenders that there is an ongoing lawsuit concerning the property’s ownership or rights. This has a number of affects, including:

• Deterring Transactions: Buyers and lenders will discover the lis pendens during a standard title search. This will make them hesitant to proceed with a sale or loan. It is much more difficult to sell or receive a loan for a property with a lis pendens filed on it. 

• Preventing Refinancing: It is almost impossible to refinance a loan on a property with a lis pendens.

• Subject to Litigation Outcome: Anyone who buys or receives a loan on the property during the litigation takes it subject to the final outcome of the lawsuit. 

Basically, after a lis pendens is filed, it becomes extremely difficult to sell the property. Most buyers, and their lenders, won’t even consider a property with a lis pendens. 

How Long Does It Take to Remove a Lis Pendens?

There is no set time limit for how long it will take to remove a lis pendens. As mentioned, there is no expiration date. The lis pendens exists until the underlying lawsuit is resolved. The length of this will depend on the complexity of the case, the caseload of the court, and whether or not the parties are willing to settle. Due to this, it can take anywhere from a few weeks to several years to remove a lis pendens.