You've done everything right. You filed your mechanics lien within the statutory deadlines, properly verified your claim, and were preparing to file suit to foreclose on the property. Then you receive notice that the property owner or general contractor has filed for bankruptcy.

Your first reaction might be panic—but don't abandon your lien claim. While bankruptcy does complicate matters significantly, understanding how federal bankruptcy law interacts with state lien rights can help you protect your position.

The Automatic Stay: Everything Stops

When someone files for bankruptcy, an "automatic stay" immediately goes into effect. This is essentially a court order that stops all collection activities, including:

• Filing lawsuits
• Foreclosing liens
• Garnishing wages or bank accounts
• Making collection calls

Violating the automatic stay can result in sanctions against you personally, so it's crucial to understand what you can and cannot do. Note that bankruptcy law might toll certain deadlines, but this area of law is complex and requires immediate professional guidance.

Getting Permission to Proceed: Relief from Stay

To enforce your lien during a bankruptcy case, you must ask the bankruptcy court for "relief from stay." This typically involves:

• Filing a motion with the bankruptcy court
• Serving the debtor and other interested parties
• Attending a hearing
• Proving that you should be allowed to proceed

Courts consider factors like:

• Whether you have a valid, perfected lien
• The value of the property versus the debt
• Whether foreclosure would harm the bankruptcy estate
• The needs of other creditors

Strategic Considerations During Bankruptcy

For contractors and subcontractors:

• Perfect your lien as early as possible in case the debtor files for bankruptcy later. Once bankruptcy is filed, you may not be able to perfect your lien.
• Consider whether the property has sufficient equity to justify pursuing foreclosure
• Monitor the bankruptcy case for opportunities to get paid through the process

For property owners:

• A mechanics lien may survive bankruptcy discharge if it's secured by real property
• You may need to address valid liens even after receiving a bankruptcy discharge
• Consider negotiating settlements during the bankruptcy case

Chapter 7 vs. Chapter 11: Different Rules

Chapter 7 (Liquidation):

• Assets are sold to pay creditors
• Secured claims like mechanics liens typically have priority
• The process moves relatively quickly

Chapter 11 or 13 (Reorganization):

• The debtor tries to reorganize and continue operating
• Your lien may be addressed in a reorganization plan
• The process can take years

When to Act Quickly

Seek immediate legal counsel if:

• You receive bankruptcy notice
• You're unsure about your rights and obligations during bankruptcy proceedings
• The bankruptcy court schedules a hearing that might affect your lien
• You're offered a settlement during the bankruptcy case

The Bottom Line

Bankruptcy doesn't automatically destroy your mechanics lien, but it significantly complicates enforcement. The key is understanding what actions you can take to preserve your rights while respecting federal bankruptcy law.

Time is often critical in bankruptcy cases, and the intersection of state lien law with federal bankruptcy law requires experienced guidance.

CTM Legal Group regularly handles mechanics lien issues in bankruptcy cases. Contact us immediately if you're facing this complex situation.

LEGAL DISCLAIMER:

This blog post is for informational purposes only and does not constitute legal advice. Do not rely on this information for legal decisions. CTM Legal Group is not your attorney unless we have a signed, written retainer agreement in place. For specific legal advice regarding your situation, please consult with a qualified attorney.