Statutory liens survive bankruptcy. Chapter 7 may still be able to help in various ways and be your best solution.
In our last blog post we introduced statutory liens as a less common but still potentially important kind of lien. A statutory lien on your home is one that is usually imposed on your home without court action. It’s imposed when you meet certain conditions specified in a written law—a statute. The most common examples are income tax liens, contractor and mechanic’s liens, and homeowners’ association liens.
The most important practical concern about statutory liens is that they cannot be removed from your home in bankruptcy like judgment liens often can. Nevertheless, bankruptcy can often help solve your financial problems if you have a statutory lien. Today we show how that can happen under Chapter 7 “straight bankruptcy,” tomorrow in a Chapter 13 “adjustment of debts.”
Chapter 7 Discharge of Personal Liability
Although Chapter 7 does not remove a statutory lien, it may take away your personal liability on the underlying debt. Bankruptcy may “discharge” the debt. This is an important and possibly confusing distinction.
There’s the debt—your personal liability to pay the money owed. And then there’s the lien on your home imposed because you didn’t pay the debt.
Some debts that result in statutory liens can be discharged and some cannot. It depends on the type of debt and often the circumstances of each case.
With income taxes, you can discharge the tax debt if it meets certain conditions, usually based on its age. But you can’t discharge more recent income taxes.
You can usually discharge debts underlying contractor/mechanic’s liens for work done on or materials supplied for your home. But sometimes the contractor or supplier might try to challenge the discharge based on allegation of fraud or misrepresentation.
Bankruptcy may discharge homeowners’ association fees and assessments, but they continue to be assessed as long as you own the property, even after you file your Chapter 7 case. They present special issue which we’ll address in a separate upcoming blog post.
The Benefit of Discharge
If you can discharge the debt underlying your statutory lien, that may give you major advantages.
First, if you are surrendering your home, the lien stays on the home but your debt goes away.
Let’s say you put a huge amount of money into trying to fix up a fixer-upper home. That resulted in major bills to a couple subcontractors and suppliers. The house has turned into a major liability and you’re throwing in the towel, surrendering it to your mortgage lender. You would likely be able to discharge those debts to the subcontractors and suppliers. The contractor/mechanic’s liens would stay with the surrendered house, and be out of your life.
Second, sometimes you can keep the home and the lien goes away, eventually.
Let’s say you owe an income tax that is old enough that it qualifies for discharge. But the IRS or state has recorded a tax lien. Also assume that your home is seriously underwater—the first mortgage is lots more than the home is worth. There is effectively no equity for the tax lien to attach to. After your Chapter 7 case discharges the underlying tax debt the tax lien survives. But the IRS/state may recognize that its lien has no equity backing it up. It may do nothing until the lien expires. The home may increase in value sufficiently in the meantime to give them more leverage. They may even try to enforce their lien in spite of the tax debt being gone. So be sure to talk with your bankruptcy lawyer directly about this.
The Big Indirect Benefit of Chapter 7
You may not be willing to give up your home to get away from the statutory lien. You may not be able to discharge the underlying debt. Or either way you may need to pay to get rid of the lien regardless. That’s where the indirect benefit of Chapter 7 comes in. Sometimes it’s worth filing a Chapter 7 case to get rid of all or most of your other debts so that afterwards you can concentrate all your financial energy on one debt. It may make sense to file bankruptcy on your other debts so that you can pay the one with the statutory lien on your home. That may be best solution for your overall situation.