Mechanic's liens: What if the developer or owner files for bankruptcy?

A mechanic's lien is generally used by subcontractors or suppliers to provide a type of insurance of payment. If the owner or developer does not pay for the work completed or materials supplied, these individuals can have a legal claim against the property for payment. Under North Carolina state law, any person who provides labor or professional design, surveying services or material for a project pursuant to a contract with the property owner can file a mechanic's lien if payment is not made.

Unfortunately, things do not always go well for these projects. In some cases, financial difficulties may lead the owner or developer to file for bankruptcy. In these instances, a subcontractor or supplier may wonder if their mechanic's lien can survive the bankruptcy.

Basics of bankruptcy

Bankruptcy is handled by federal courts. Essentially, once a bankruptcy is granted an automatic stay is issued. This court order requires all collection efforts and creditor actions to cease. Creditors are not allowed to move forward with collection efforts against the debtor or the property outside of the bankruptcy proceeding. There are few exceptions to this rule.

In some cases, if the work described within the mechanic's lien is completed prior to the filing of the bankruptcy petition, the holder of the mechanic's lien may qualify for an exception from the automatic stay. Although this exception does not necessarily mean the holder of the lien can move forward with attempts to receive payment, it will lead to a more favorable position and increase the likelihood of recovering payment after the bankruptcy proceeding is completed.

Legal counsel can help

Although the mechanic's lien may qualify as an exception to the automatic stay, it is important to note that creditors who move forward with an attempt to receive payment after the automatic stay is in effect could face sanctions and damages for violation. In addition, moving forward with the exception is a many tiered process. For example, in addition to filing for relief from the automatic stay with the court the holder of the mechanic's lien may also be required to file notice of perfection of the mechanic's lien to all other creditors.

Due to the complex nature of this process, it is wise that those who hold mechanic's liens in this situation contact an experienced construction law attorney. The legal professionals at Triangle Law Group can assist you with your business law needs, but do not practice bankruptcy.