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When we last left off we had determined that the Bankruptcy Code allows for the perfection of a mechanics’ lien during the automatic stay, if the lien arose prior to the filing of the bankruptcy petition.  We were left with a problem, however.  Despite the fact that a mechanics’ lien may be perfected during the automatic stay, the exception that allows the perfection of the lien does not apply to enforcement.  And, since mechanics’ liens face strict deadlines for enforcement – at the risk of extinguishment – how can a mechanics’ lien holder protect himself in this situation?

Fortunately, the Bankruptcy Code does provide a mechanism for preserving the lien claimant’s rights.  The claimant can file a lien preservation notice with the bankruptcy court to notice his intention to preserve and enforce his lien rights.  These notice requirements are found in Bankruptcy Code Section 546(b)(2), which states as follows:

(B) … such an action has not been commenced before the date of the filing of the petition; such interest in such property shall be perfected, or perfection of such interest shall be maintained or continued, by giving notice within the time fixed by such law for … such commencement.

And 11 U.S.C. Sec. 108(c):

Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of–

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

Notice under this section serves to show that the lien holder intends to enforce his 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’s bankruptcy trustee (in a Chapter 7 case), or on the debtor in possession (in a Chapter 11 case), prior to the deadline for commencing an action to enforce the lien rights in that state.  If this notice is correctly filed, it tolls the foreclosure deadline until at least 30 days after the automatic stay is lifted.

Another possibility for a mechanics’ lien holder is to petition the bankruptcy court for relief from the automatic stay.

Keep checking back for more information on the intersection of Mechanics’ Lien Law and Bankruptcy.

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