We have determined that a mechanics’ lien is a powerful tool even when confronted with a bankruptcy petition. This puts a mechanics’ lien holder in an enviable position when attempting to recover a debt. However, a bankrupt debtor can avoid certain types of liens in a process known as “lien-stripping” even though they are “secured” by the debtor’s property. This would be an unfortunate outcome for a creditor who thought he would be paid on his secure debt.
Liens normally survive bankruptcy unaffected by the debtor’s discharge. However, some liens are avoidable if the debtor takes specific affirmative action. So, what liens can be avoided, and should a mechanics’ lien holder be worried?
Certain liens are avoidable if they attach to assets a debtor is entitled to claim as exempt, and to the extent that the lien impairs the value of the exemption. A lien impairs the value of the exemption if their is not enough equity in the liened asset to cover the non-avoidable liens, the exemption, and the avoidable lien.
Luckily, though, a mechanics’ lien holder does not have to go into the calculation of whether the lien impairs the value of an exemption. The final requirement for a lien to be avoidable is that the lien must be either a judicial lien, or a non-possessory non-purchase money security interest. Mechanics’ liens are statutory liens, and as such are unavoidable in a bankruptcy proceeding and will survive the bankruptcy unaffected.
So: Mechanics’ Liens can be perfected during the automatic stay, the time requirement for enforcement can be tolled during the automatic stay when the bankrupt debtor is the property owner, the lien may be enforced during the bankruptcy proceeding if the bankrupt party is not the property owner, and the lien is unavoidable. Mechanics liens are an invaluable tool in collecting debt even if the waters are clouded by bankruptcy.
Most Viewed