Bankruptcy and Mechanic’s Liens
When a company files bankruptcy, the court grants them an automatic stay, which essentially means that anyone owed money by the bankrupt company must cease any and all collection activity. Companies can petition the court for relief from the automatic stay, but if they don’t do that, they should remember that violating the automatic stay can result in a disallowance of their company’s claim.
However, perfecting a mechanic’s liens doesn’t necessarily count as a collection act, and attempting to do so doesn’t violate the automatic stay so long as the lien itself arose prior to the debtor’s actual bankruptcy filing. So, perfecting a lien is legal even after the buyer’s bankruptcy is filed, but it’s important to remember that perfecting and enforcing a lien are two different things. Perfecting is okay after bankruptcy, but enforcing a lien would violate the automatic stay.
Since each state has its own enforcement deadlines this can be quite a headache for any construction creditor, but that’s where the Bankruptcy Code comes to the rescue with the lien preservation notice (Bankruptcy Code Section 546(b)(2)). Such a notice can be filed with the court wherein the debtor has filed, and doing so informs the court that the creditor in question intends to preserve and enforce their lien rights. It also must be served to the debtor’s trustee or a debtor in possession should one exist in a Chapter 11 case.
The filing deadlines for a lien preservation notice vary by state, and basically the notice must be filed with the bankruptcy court and the debtor, debtor’s trustee or debtor in possession by the same deadline the state has for enforcing a lien. Then, once it’s properly filed, the lien preservation notice pushes out the foreclosure deadline until 30 days after the court relieves the automatic stay (11 U.S.C. Section 108(c)).
