Will Bankruptcy Clear a Mechanic's Lien?

Mechanic's Lien

When a property owner files for bankruptcy, one key concern is how existing liens, including mechanic's liens, will be treated. The automatic stay provision in bankruptcy law temporarily halts most collection activities, including actions to enforce mechanic's liens. However, this does not mean the lien is automatically discharged.

A mechanic's lien is a legal claim against a property that has been remodeled or improved. Mechanics, contractors, and other building professionals may file these liens when they have not been paid for their services or materials. This ensures that they have a way to secure payment by claiming a right to the improved property. Mechanic's liens can significantly impact property transactions, as they can delay sales or refinancing efforts until resolved.

Chapter 7 Bankruptcy and Mechanic's Liens

In a Chapter 7 bankruptcy, the debtor’s non-exempt assets are liquidated to pay off creditors. Mechanic's liens are considered secured debts, meaning they are backed by the property. As a secured creditor, the lienholder has a higher priority in the distribution of the bankruptcy estate compared to unsecured creditors. If the property tied to the mechanic's lien is sold during the bankruptcy proceedings, the proceeds will first go to pay off the lien before other creditors receive payment.

However, if the lien is not paid in full through the liquidation process, the remaining debt associated with the lien may not be discharged. The lien itself can survive the bankruptcy, meaning that if the debtor retains the property, the lienholder can still seek payment through foreclosure once the bankruptcy stay is lifted.

Chapter 13 Bankruptcy & Mechanic's Liens

Chapter 13 bankruptcy involves reorganizing the debtor's finances and creating a repayment plan to pay off debts over three to five years. In this scenario, a mechanic's lien is also treated as a secured debt. The repayment plan must account for paying off the secured amount of the lien.

Chapter 13 provides a mechanism called "lien stripping" for certain junior liens, which can reduce the secured claim to the actual value of the collateral, potentially lowering the overall debt owed. However, lien stripping is typically more applicable to second mortgages rather than mechanic's liens.

If the repayment plan successfully pays off the amount secured by the mechanic's lien, the lien can be considered satisfied, and the property owner can emerge from bankruptcy with the lien removed. Failure to adhere to the repayment plan, however, could result in the lienholder regaining the right to enforce the lien through foreclosure.

Contact a Bankruptcy Lawyer for Help

While bankruptcy can provide relief from many types of debt, it does not automatically clear a mechanic's lien. The specific outcome depends on the type of bankruptcy filed and the handling of secured debts within the proceedings.

Property owners must be proactive and informed to navigate these challenges effectively, and having experienced legal support is the best way to prepare for the unexpected. can provide the legal advice and services you need to handle every aspect of the bankruptcy process.

Contact us today to request a consultation and learn more about how we can help.

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