Chapter 7 doesn’t wipe away “statutory liens.” But Chapter 13 gives you a safe and flexible way to deal with them.
In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” can help you keep your home. Today we get into the 8th of those 10 ways. Here’s how we introduced this earlier.
8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens
A “statutory lien” on your home continues in effect after a Chapter 7 “straight bankruptcy” is completed.
A “lien” is a “charge against or interest in [your home] to secure payment of a debt or performance of an obligation.” See Section 101(37) of the Bankruptcy Code. As you’d expect, “statutory liens” are those which arise automatically because of a statute (a written law). Here are some examples.
- Utility lien for an unpaid utility bill
- Contractor’s lien (sometimes called a “construction,” “mechanic’s” or “materialman’s” lien) for an unpaid, (and often disputed), home remodeling or repair debt
- Homeowner association lien for unpaid dues or assessments
- Local government liens for unpaid fees against your property
What happens when these liens against your home continue in force after a Chapter 7 case? The creditors often have the right to foreclose the lien against your home to force payment. Or at least the lien would force you to pay whenever you’d sell or refinance your home.
In contrast, under Chapter 13 your home would continue being protected while you paid off the lien. You would generally have three to five years to satisfy the lien.
Here’s how this works in practice.
Assume that you own a home that a year ago was worth about $190,000, with a $170,000 mortgage. Back a year ago you realized it badly needed a new roof and repairs to its foundation. You had very little money available but felt you had no choice but to get the work done.
So you hired a contractor who was willing to do the work, partly financed through a finance company. The agreed price was $15,000, assuming things went as expected. You paid $1,000 out of savings, $4,000 through a credit card cash advance, and financed the remaining $10,000.
But partway through the project the contractor found unexpected dry rot in the roof’s structural wood plus water seepage into the basement. He spent $15,000, the original full contractual amount, in materials and labor trying to fix the extra problems. But another $10,000 was needed to finish the job.
The contract was vague about what would happen in this situation. After you discussed this with the contractor, he finished the job and billed you for the additional $10,000. When you didn’t pay it on the due date he recorded a $10,000 construction lien against your home.
You owe lots of other debts so you’re trying to figure out whether bankruptcy would solve your financial problems.
Chapter 7 May Not Help Enough
A contractor’s lien is a “statutory lien.” As mentioned above, “statutory liens” continue in effect after a Chapter 7 case. So that $10,000 contractor’s lien would continue saddling your home’s title. And the contractor would be able to pursue whatever rights that lien provided to him. That likely includes foreclosing on your home to force payment. At the very least you would have to pay off the $10,000 whenever you sold or refinanced your home.
A Chapter 7 may still sometimes provide enough practical benefit. If it discharges (legally writes off) enough other debts, you may be able to have enough monthly cash flow available to make a deal with the contractor. But you are at a disadvantage because of the rights the contractor’s lien gives him over your home. You’d have to pay on whatever terms the contractor demands.
So, Chapter 7 helps you potentially, but only a little, with a contractor’s lien. It doesn’t protect your home all that much.
The Chapter 13 Solution
Chapter 13 can help a lot more.
On the $10,000 owed, you would usually have as much as 5 years to pay it. Throughout that time your home is protected from foreclosure and other collection efforts.
You could usually pay that debt ahead of most other ones. In fact, you would pay that debt in full before paying anything on your “general unsecured” debts. These are your run-of-the-mill credit cards, medical bills, and indeed all or most of your other unsecured debts.
The $4,000 credit card cash advance you paid to the contractor up front is likely also a “general unsecured” debt. So you would usually not pay this debt anything unless and until the contractor’s $10,000 was paid in full. If during the term of your Chapter 13 case you had only enough money to pay the $10,000 (and any other debts or expenses that must legally be paid in full), you’d not have to pay anything on the $4,000 cash advance and the other “general unsecured” debts.
By the completion of your Chapter 13 case you’d have paid off the $10,000 debt owed to the contractor. He’d then release the contractor’s lien. Whatever portion of the $4,000 cash advance and other “general unsecured” debts that you would have not paid would then be written off, “discharged.” Other than the home mortgage, you’d be debt-free.