How to Avoid Statutory Liens in Bankruptcy

A statutory lien is a legal, security interest in property or income that has been created by law and is not necessarily spelled out in a consumer debt contract. Avoiding statutory liens during bankruptcy is sometimes feasible, but certain factors can impact the success.

Types of Statutory Liens

There are many different kinds of statutory liens, but they all have one thing in common: they have been created by law. Some of the examples of common statutory liens that come up during bankruptcy proceedings include:

• Tax liens – This type of lien gives government the right to possess and/or sell property if a tax obligation has not be paid after a set period of time.
• Contractor’s lien – A contractor who performs work on a house or a mechanic who works on a vehicle has a right to place a statutory lien on the property in question if payment for work is not rendered.
• Judgment – The courts can place liens against real property or income and assets during the judgment phase of certain types of lawsuits.
• Rental – Landlords who have not been paid rent have statutory rights that can result in liens.

Ways to Avoid Statutory Liens

By their very nature, statutory liens are often not subject to discharge during a bankruptcy proceeding. There are certain circumstances, however, that can enable a request for the discharge of this type of debt. The scenarios where statutory liens may be avoided include:

• If a statutory lien is created to only become effective upon a debtor’s insolvency
• If a statutory lien is not enforceable against a bona fide purchaser on the date of commencement of the case
• If a lien happens to related to rent
• If certain financial requirements apply and the lien involves exempted property, such as a personal home.

Factors that Impact Avoidance

Statutory liens are generally designed to prevent avoidance during bankruptcy. There are some factors that can impact avoidance favorably or unfavorably for the debtor. They include:

• The type of bankruptcy filed for
• Exemptions that apply in the case
• State and local laws that may be recognized by bankruptcy courts
• The timing of statutory liens in regard to the case and/or declaration of insolvency

Statutory liens by their very nature are difficult to walk away from during bankruptcy. It is best to seek the advice of a qualified bankruptcy attorney to determine if a lien might be avoiding during a bankruptcy discharge.