Statutory liens on your home cannot be gotten rid of in bankruptcy like judgment liens often can. So it’s important to know what they are.
Statutory Liens Are Rare, Sort of
There’s a good chance you don’t have any statutory liens on your home. But you may.
- Has the IRS or your state recorded a tax lien against your home for unpaid income taxes?
- Have you had a dispute with a roofer or some other kind of building contractor resulting in a contractor’s or mechanic’s lien?
- Are you late on monthly dues or special assessments to your homeowner association, resulting in a lien against your condo?
These are the most common kinds of statutory liens on your home.
What Is a Statutory Lien?
The U.S. Bankruptcy Code says that “the term ‘statutory lien’ means [a] lien arising solely by force of a statute on specified circumstances or conditions.” (Section 101(53).) A statutory lien is essentially created automatically, by operation of a statute, without further action by a court.
A statute is a law formally written down. The statutes creating statutory liens usually are state statutes, but can be federal ones as well.
And what’s a lien? It’s an interest in property—here, your home—that secures payment of a debt. (Section 101(37).)
So a statutory lien on your home is one that arises under certain circumstances simply because of a statute. This excludes liens you voluntarily enter into, like a mortgage. Or such as when you include your home as collateral on a loan, like from the Small Business Administration. A statutory lien is not voluntary on your part.
Also, for bankruptcy purposes statutory liens exclude judgment liens, which are also involuntary. But judgment liens aren’t created automatically by statute. They take further action by a court. See our three blog posts earlier this month (January 4, 6, and 9) about judgment liens.
Based on all this you can see how income tax liens, construction and mechanic’s liens, and homeowners’ association liens are statutory liens. They are all created by statutes and the creditor can bring them into effect essentially automatically upon certain conditions.
Discharge of Debts but Not of Liens
A successful individual bankruptcy case “discharges” all or most of your debts. That means it forever wipes out your personal liability on those debts. But if you have any liens securing some of those debts, most of the time the liens remain and have to be dealt with.
For example, you can usually discharge the debt you owe on your home mortgage. But if you want to keep your home you almost always need to pay off the lien you gave the lender to get the home loan. Or else you deal with the lien by surrendering the home if you don’t want to satisfy the lien through payment.
With a statutory lien on your home, you may or may not be able to discharge the underlying debt. For example, with an income tax lien the tax owed may meet the conditions for discharge—usually by being old enough. Or the tax may not be dischargeable. But either way you have to still deal with the tax lien.
In contrast, judgment liens, or “judicial liens,” on your home can often be “avoided”—gotten rid of through bankruptcy. (Section 522(f) of the Bankruptcy Code.) Statutory liens cannot.
Addressing Statutory Lien in Bankruptcy
So you can’t get rid of—“avoid”—statutory liens. But that doesn’t mean bankruptcy can’t enable you constructively address them. Our next blog post or two will be about how filing a Chapter 7 or Chapter 13 case can help.