Can Bankruptcy Remove a Statutory Lien?

In simple terms, lien is a legal claim over a property of a person. There are three types of liens - consensual, statutory and judicial. Each type of lien is treated differently in a bankruptcy proceeding.

Liens in general

Judicial liens can be avoided in a bankruptcy proceeding. Under Section 522(f) of the United States Bankruptcy Code, a judicial lien can be avoided to the extent it impairs the debtor’s exemptions. Consensual liens like a mortgage cannot be avoided in a Chapter 7 proceeding but Chapter 13 has a provision for lien stripping which allows the debtor to avoid the lien in certain circumstance. A statutory lien is generally never wiped out by bankruptcy.

Statutory lien

Section 101(38) of the Bankruptcy Code defines a statutory lien as a lien arising solely by force of a statute. It must be a lien arising automatically by operation of a statute, not one requiring subsequent judicial action. A statutory lien is a lien created by statute or law.

Types of statutory liens

There are many types of statutory liens. The common ones include:

• Tax lien - liens afforded to the Internal Revenue Service by the Internal Revenue Code on property of delinquent taxpayers;
• Landlord’s lien - liens afforded landlords on the furniture in an apartment for failure to pay rent;
• Artisan’s lien - liens afforded persons performing maintenance or repair on automobiles or other personal property for failure to pay for the maintenance or repair;
• Mechanic’s lien - liens afforded contractors and suppliers on works of improvement to real property for failure of an owner to pay for construction or materials;
• Vendor’s lien - liens afforded sellers of real property on the real property sold in the event the buyer fails to make payment when due;
• Warehouseman’s lien - liens afforded warehouses and other storage facilities on property stored to secure unpaid storage fees

Generally statutory liens will not be discharged in a bankruptcy proceeding.

Fixing of statutory lien

Under Section 545, the trustee can avoid the fixing of a statutory lien on a debtor’s property to the extent that such lien first becomes effective against the debtor in any of the following cases:

• when a case under this title concerning the debtor is commenced;
• when an insolvency proceeding concerning the debtor is commenced;
• when a custodian is appointed or authorized to take or takes possession;
• when the debtor becomes insolvent;
• when the debtor's financial condition fails to meet a specified standard;
• when the lien is levied at the instance of an entity other than the holder of such statutory lien.

The bankruptcy trustee can also avoid the fixing of a statutory lien on a property if the lien is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists or the lien is a lien is for rent or a lien of distress for rent.

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Consult with an experienced bankruptcy attorney to know more about removing statutory liens in bankruptcy. The attorney will study your case and advise you about your options.