Perfecting Mechanics Liens in Bankruptcy

        Mechanic’s liens are a secured debt, and therefore while bankruptcy will discharge the obligation to pay the money owed for the services performed, the holder of the mechanics lien can still force a sale of the property to collect what he is entitled to under the contract, or wait and demand his share of the proceeds when other circumstances cause the owner to dispose of the property.

        Section 362 of the United States Bankruptcy Code creates an automatic stay when a debtor files bankruptcy, which prevents a creditor from taking any action to enforce the debt, after a bankruptcy is filed. Since a mechanics lien needs to be recorded to be enforceable, a bankruptcy lawyer  sometimes hears the question, whether the creditor may record the mechanics liens after his customer files for bankruptcy.

         At first glance the answer may appear to be no, since clearly the reason a creditor records a mechanics lien is because he is hopeful that this action will improve his chances of collecting from the creditor.  Section 362 however provides an exception for perfecting liens that are in existence prior to the bankruptcy filing. Since by law the mechanics lien arises, when the work is done, this means that the creditor holding the lien will still be able to record it after the debtor files.