Bankruptcy Debtor Denied Motion To Avoid Liens

March 17th, 2010 by Reed Allmand

In the Chapter 7 bankruptcy case of Spears, Raquel C.; In re, the debtor was denied a motion to avoid two liens against a commercial property that she owned.

The details of the bankruptcy case:

The Chapter 7 debtor filed a motion to avoid a judgment lien and a mechanic’s lien against commercial property that she owned. The debtor asserted that the mort­gage on the property exceeded the property’s value, leaving no equity to secure the two liens. Because the property could not be claimed as exempt, the debtor was unable to avoid the judicial lien under Section 522(f). Instead, she asked the court to avoid the judgment and mechanic’s lien pursuant to Section 506(a)(1) and (d). In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court ruled that Chapter 7 debtors could not use Section 506(d) to avoid wholly unsecured liens. The debtor argued that the amendment to Section 506(a) made by BAPCPA expressed congressional intent to limit se­curity interests to the value of the underlying collateral and, by implication, overrule Dewsnup. The bankruptcy court dis­agreed. “The obvious purpose of Section 506(a)(2) is to codify the appropriate methodology for valuation of personal property, for use in those instances where the Bankruptcy Code allows the application of Section 506(a)(1).

Debtors who file bankruptcy need to know that if they file bankruptcy with a mechanic’s lien on their home or other property, that creditor will be treated a secured creditor by the bankruptcy court.  As a secured creditor in bankruptcy, the mechanic’s lien holder may be entitled to full payment provided that the property securing the lien has value in excess of prior liens and encumbrances. While bankruptcy’s automatic stay prohibits the holder of the mechanic’s lien from filing a lawsuit or filing a foreclosure, Section 546(b)  of the bankruptcy code allows the mechanic’s lien holder to file a “notice of perfection of lien” with the bankruptcy court as an alternative to filing an action to foreclose, provided that the notice is filed within 90 days after the lien is recorded. Also the mechanics’ lien holder must file a proof of claim with the bankruptcy court in order to be recorded as a secured creditor with the court and seek repayment. A holder of a mechanic’s lien may be able to proceed with a lawsuit and foreclose on the debtor’s property after the debtor files bankruptcy if… 1) the Bankruptcy Trustee abandons the real property subject to the mechanics’ lien; 2) the bankruptcy case is dismissed; or 3) the Court grants another interested person’s request for relief from the automatic stay.