The last few posts studying the interplay between mechanics liens and bankruptcy examined some interesting procedural aspects, but really, all the information boils down to how it relates to one question: Will I Get Paid?
Since mechanics liens have a rare ability to be perfected after the automatic stay, and can emerge unscathed and in full effect after the bankruptcy process, they provide a fantastic opportunity for you to be paid despite a party’s bankruptcy. Here are a few ways a mechanics lien better positions you to recover the money owed to you when you are faced with a bankruptcy petition.
1. Mechanics liens are secured debt. Secured debt is much more likely to be paid in a bankruptcy proceeding than unsecured debt, because the secured creditor has an interest in the property of the debtor.
2. Mechanics liens cannot be “stripped”, or avoided by the bankrupt party. A mechanics lien emerges after the bankruptcy discharge in full effect, and can be foreclosed upon.
3. A mechanics lien allows you to sue all the parties “up the chain” from you to the owner, not just the party with whom you have a contract.
Here is an example of how a mechanics leon can work for you in bankruptcy. Say you are a supplier who was hired by a subcontractor. Now say that you don’t get paid, and that subcontractor files for bankruptcy. Let’s look at how your claim might proceed with or without a mechanics lien.
If you don’t file a mechanics lien, you only have the right to file a claim against the subcontractor with whom you contracted. If that contractor files for bankruptcy, you are, unfortunately, unlikely to be paid. You will be an unsecured creditor, and the subcontractor’s debt will likely be expunged through the bankruptcy discharge.
Now, if you have a mechanics lien, the situation is different. You have the right to file suit against not only the subcontractor that hired you, but also the prime, and the property owner – this opens up greater possibilities of getting paid. Further, if we change the above situation so that it was the property owner who went bankrupt – you are still protected. Your mechanic’s lien would secure your claim, and your lien would stay in effect after the bankruptcy discharge.
So, a mechanics lien provides great opportunity to be paid – even in a bankruptcy situation where payment is otherwise unlikely. The mechanics lien is a powerful tool. Use a service like Zlien to manage your mechanics liens, or stay on top of them yourself, and you will be in the best possible position to be paid for your work in every circumstance.