One reason mechanics liens are so useful is the can still survive bankruptcy proceedings. A bankruptcy filing won’t wipe out a mechanics lien, which is good for claimants. Further, a lien claimant has finite steps they can take to best preserve their rights during that bankrupcty. But, there are still some other considerations to keep in mind – like how to enforce a mechanics lien during the automatic stay.
Bankruptcy and mechanics liens
The reasons a mechanics lien will survive is because a lien is what's known as a secured debt- meaning, the debt is tied to the project property. And, in bankruptcy proceedings, having a secured debt is a lot better than unsecured debt.
Unsecured debts will typically be extinguished during bankruptcy proceedings. But since the debt is attached directly to the property, it will likely be paid according to its priority status, For a full breakdown of lien priority, check out What Happens When Everybody Is Trying to Grab a Piece from the Same Pie?
Enforcing a mechanics lien during bankruptcy
Having a mechanics lien filed prior to the bankruptcy is the best case scenario. But, mechanics liens still have enforcement deadlines. An Arizona mechanics lien must be enforced within 6 months from the date when the lien was filed. Although you will retain lien rights, enforcement will still be a but complicated,
To avoid the enforcement deadline from passing, the claimant can typically file a lien preservation notice with the bankruptcy court as an intent to enforce the lien. This is filed with the bankruptcy court and served on the bankruptcy trustee . And, to be sure, this must be done before the lien enforcement deadline passes.
Although the law helps to protect lien claimants when faced with a client's bankruptcy, contacting a bankruptcy attorney is always a good idea.
NOTE. The information presented here is for informational purposes only. It is not legal advice and should not be construed nor relied upon as such. Furthermore, this posting does not create an attorney-client relationship. If you need legal advice, seek the counsel of a licensed, local attorney.See More...See More...