Avoiding Statutory Liens in Bankruptcy

The Bankruptcy Code separates judicial liens (liens often created by a judgment) from statutory liens (liens often created by a statute). Judicial liens are generally avoidable by a debtor in Chapter 7 bankruptcy, but statutory liens are not. See Section 522(f) and Section 545. However, it is not always clear when a lien is a statutory lien and when it may be a judicial lien. Below are some common statutory liens:

Tax liens attach to property for unpaid taxes by federal or state law. These include liens by the IRS, and state or local taxing authorities.

Landlord’s lien. About half the states grant a landlord a statutory lien on personal property located in the renter’s home for unpaid rents. But see In Re MacLure, 50 B.R. 134 (Bankr. D.R.I. 1985)(finding a landlord’s lien under Rhode Island law a judicial lien and not a statutory lien).

Artisan’s lien. Most states allow mechanics a lien for repairs made to personal property (such as an automobile).

Mechanic’s lien. Laborers, contractors, or suppliers can attach a statutory lien to real property to secure payment of construction or materials used to improve the property.

Vendor’s lien. Some states allow a statutory lien to the seller of real property until the full purchase price of the property is received.

Warehouseman’s lien. Warehouses and other storage facilities may have a statutory lien on the property contained in the storage facility for unpaid storage fees.

 Certain statutory liens may be set aside by a bankruptcy trustee under Section 545. This Section allows a trustee to avoid a statutory lien under three circumstances: First, if the lien only took effect because the debtor became insolvent or filed bankruptcy; second, the lien may be avoided if the lien could not have been enforced against a bona fide purchaser outside of bankruptcy (an unrecorded/unperfected tax lien fits this description); and finally, the trustee may avoid a landlord’s lien for unpaid rent.

This statutory lien avoidance power is also extended to debtors through Section 522(g)-(h) of the Bankruptcy Code when:

(1) the debtor’s transfer of property was involuntary;

(2) the debtor did not conceal the property;

(3) the trustee did not attempt to avoid the transfer;

(4) the debtor seeks to exercise an avoidance power enumerated under § 522(h); and

(5) the transferred property could have been exempted if the trustee had avoided the transfer under the provisions of § 522(g).

See McCarthy v. Brevik Law (In re McCarthy), 501 B.R. 89 (B.A.P. 8th Cir. 2013); DeMarah v. United States (In re DeMarah), 62 F.3d 1248 (9th Cir. 1995). If the above conditions are met, the debtor has standing to avoid a statutory lien under Section 545.

Avoiding nonconsensual liens in bankruptcy can be highly complex and full of traps for the unwary. If you have a statutory lien against your property and need debt relief, discuss your situation with an experienced bankruptcy attorney.