You finished a job on Tuesday, great. On Wednesday the property owner filed for bankruptcy, not so great. On Thursday you throw the file in the trash, you are never getting paid on this job.
Or are you?
Even if the property owner files for bankruptcy- you should file a lien after bankruptcy against the property. You still have the right to get paid for the job, you hold a valid, secured debt- which puts you pretty high on the list of bankruptcy debtors, and gives you a good chance of getting paid.
What is a ‘Secured- Debt’?
The good thing about a mechanics lien after bankruptcy is that it is a secured debt, it is a lien against real property. It is on equal footing with owing money on a mortgage- so you are near the top of the list to get paid, assuming there are some assets to pay those debts at the end of the bankruptcy process. If the property is mortgaged, however, the mortgage will usually get paid first- before any liens. Also, the liens will be paid in the order they were put on the property, so the earliest lien will get paid first. If the property doesn’t have any equity above the mortgage, or if there are numerous liens before yours, and there is no value left in the property, you might not get paid. If the debtor wants to keep the property, bankruptcy does not relieve a debtor of the obligation to pay secured debt. So filing a lien after bankruptcy on the property puts you in the best position to get paid if funds are available
What Do You Have to Do to Protect Your Rights?
- You must file a mechanics lien
The same as on any other project where you haven’t been paid, you must file a lien. The automatic stay in a bankruptcy proceeding does not prevent you from filing the lien after bankruptcy, nor does it affect the timelines to file the lien, you must still be timely to protect your rights.
- You must provide the bankruptcy court and parties with notice that you have a lien
Filing a notice tells the parties that the lien holder (you) intends to enforce the mechanics lien against the real property that is subject to the lien. This notice must be filed with the Bankruptcy Court and served on the debtor prior to the deadline for commencing an action to enforce the lien rights in the state where the work was performed. If this notice is correctly filed, it stops the lien deadline from running, until 30 days after the ‘automatic stay’ is lifted.
- You must enforce the lien with the bankruptcy court, or after the termination of the bankruptcy.
Just like any other lien, once the stay is lifted, you must move the case forward to enforce the lien and ensure you get paid.
All of these other legal proceedings complicate the procedure of making sure you meet the deadlines to perfect and enforce the lien. First, you may need to file the notice of lien as described above to stop the timelines from running. Then you need to keep an eye on the bankruptcy to make sure that you file the appropriate documents to enforce the lien as the case progresses, and once the ‘automatic stay’ is lifted.
Throwing a bankruptcy into the mix of already complicated lien procedures can be confusing. For help understanding how the laws apply to your specific situation, reach out to the experienced team at National Lien & Bond. Our attorneys are focused on helping you protect your interests during all points of a project, so reach out today and set up a free consultation with a member of our team.
This blog post is for educational purposes only