How are contractor liens impacted by bankruptcy?

Contractors that perform work on your home can often have what is known as a mechanics' lien on the property. Imagine a contractor who does substantial work to renovate a homeowner's kitchen. This contractor might require some payment up front and take the rest of the payment later. But if the homeowner never pays, the contractor simply can't repossess the goods he or she sold. They have been customized and installed in the home.

The solution in the construction industry is that the contractor can take a lien against the home. The lien is in place on the title until the full payment is made on the work or other legal action is taken to remove the lien from the property. If, for example, you can prove that the contractor did not properly or fully complete the work, you might be able to have the lien revoked.

Mechanics' liens are impacted by bankruptcy filings, but the details on how they are impacted differs by situation and state lien laws. If a mechanics' lien is filed, what was previously an unsecured debt is now a secured debt -- it is tied to the property in question. That means that it has to be treated different under the bankruptcy code. Mechanics' liens are also not always completely bound by the automatic stay of bankruptcy, particularly if there are third-party interest owners in the property who can now become responsible for the debt.

A mechanics' lien might be discharged during bankruptcy, particularly in a Chapter 13 proceeding where you end up making some payment to the contractor. But understanding how the lien impacts the structure of your bankruptcy is important. Mechanics' liens are just one example in a long line of unique lending situations that could change the way you deal with a Chapter 7 or 13 filing. Working with a bankruptcy lawyer can ensure these issues are handled appropriately to avoid problems with your case.

Source: Bankrate, "Get lien off property after bankruptcy," Justin Harelik, accessed Aug. 19, 2016