Dealing with Statutory Liens on Your Home in Bankruptcy
Bankruptcy cannot remove contractor’s liens or other statutory liens from your home, but both Chapter 7 and 13 can help you deal with them.
A bankruptcy “discharge” legally and permanently wipes out your personal liability for most debts.
But it doesn’t automatically remove liens from your home. Each different type of lien is dealt with differently in bankruptcy, so it can certainly be confusing. The blog posts of the past three weeks have been about these difference, regarding liens securing first and second mortgages, property taxes, income taxes and judgments.
Today we’re talking about a category that does not get much attention on bankruptcy lawyer’s websites, “statutory liens.”
What’s a “Statutory Lien”?
The Bankruptcy Code defines a statutory lien as a lien “arising solely by force of a statute.” See Section 101(53).
A “lien” is an interest in property—in our situation, an interest in your home—that secures payment of a debt. (Section 101(37).) It’s what turns a debt that is not secured by anything you own into a debt that is secured by your property—your home.
A statute is a written law based by a legislative body—mostly federal or state.
Statutory liens exclude “judicial liens,” which arise out of a lawsuit and its judgment, commonly called judgment liens. See our two last blog posts about them.
Statutory liens are not generally created voluntarily, by agreement, like a home mortgage or vehicle lien when you finance its purchase.
So, essentially statutory liens are created automatically by operation of a statute.
Some Common Statutory Liens
Most statutory liens are created by state law, so they vary from state to state. The main ones that apply to homes are:
- Mechanic’s lien. This is a broad term for liens on your home for contractors, laborers, or suppliers if you don’t pay for the construction or materials used to improve the home.
- Income Tax lien. These are liens imposed by the IRS under federal law and by state and local taxing authorities under state law for unpaid tax obligations. These come up so often and have so many special twists that we dedicated four recent blog posts to them (from May 23 through 30).
- Homeowners’ Association lien. If you don’t pay the fees or any special assessments owed to your homeowners’ association in most cases a lien will usually automatically attach to your property. In certain states homeowners’ association liens are given “super lien” status, meaning that they get paid ahead of the mortgage and certain other liens.
No “Avoiding” of Statutory Liens
Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” allow you under certain circumstances to “avoid” judgment liens, to release them from your home’s title. See Section 522(f) of the Bankruptcy Code. As a result the judgment debt that was secured by your home through the judgment lien again becomes an unsecured debt. Then usually you can discharge the underlying debt, owe nothing, and have no lien on your home.
You can NOT do this with statutory liens. The lien survives your bankruptcy case, and remains on your home.
How Chapter 7 Can Help
“Straight bankruptcy” can help you deal with statutory liens in only limited ways. Mostly, it can discharge other debts so that you can start focusing your attention and as needed your financial resources on paying off the statutory lien.
So, for example, if you owe a home repair contractor on a roof job and you’re in a dispute with him or her about the quality of the job or other terms of the contract, getting rid of most of your other debts lets you concentrate your time and money on this. You’ll better be able to come to a fair settlement and then pay off any remaining obligation as quickly as possible.
How Chapter 13 Can Help
The Chapter 13 “adjustment of debts” version of bankruptcy gives you more leverage. You generally can put together a payment plan to address all of your debts, one which could highly prioritize the one secured by the statutory lien. But if you had other even more urgent obligations (such as back payments on a home mortgage, vehicle payments, or child support) you would usually have much more flexibility in dealing with the debt with the statutory lien than under Chapter 7.
In the example of the debt owed to the roof contractor, your court-approved Chapter 13 plan could likely front-end payments to the contractor to pay off that debt as quickly as possible. Or under certain circumstances—such as if there was plenty of equity in your home to cover the contractor’s lien—you could drag that perhaps as long as 5 years so that you could pay other urgent debts earlier.
In general determining how much you can manipulate payment of statutory liens in Chapter 13 bankruptcy gets quite complex and depends on many factors. Be sure to discuss your options fully with a knowledgeable bankruptcy attorney.