The Fragility of Liens in Bankruptcy

In a past article we discussed how a mortgage does not “go away” in bankruptcy, and that is generally true of all liens-they pass through bankruptcy unaffected or, alternatively, the lien creditor may obtain relief from the stay and foreclose or otherwise proceed against the property.  There are certain liens however, that are put in jeopardy by a bankruptcy filing.  A few of the more common of those situations are as follows:

Unperfected security interests.  Unperfected security interests provide a modicum of protection to the secured creditor outside of bankruptcy because the unperfected secured creditor still has greater rights than an unsecured creditor.  However, that protection disappears in bankruptcy.  The “strong arm powers” of the bankruptcy trustee allow the trustee to avoid unperfected security interests.   The lesson: always perfect your security interest as soon as possible.

Preferences.  Security interests created or judgment liens entered within 90 days of the bankruptcy filing may be avoided by the bankruptcy trustee under the trustee’s preference power, if the liens are on account of an antecedent debt, made while the debtor is insolvent, and if the lien would allow the creditor to recover more than an unsecured creditor (which it surely would).  The lesson: obtain your judgment or create and perfect your security interest as quickly as possible.  The faster you secure your position, the sooner the 90 days run.

Fraudulent transfers.  The trustee’s fraudulent transfer power arises when a transfer occurred within a year prior to the bankruptcy filing and the transfer was made (i) with the intent to hinder, delay or defraud creditors or (ii) less than a reasonably equivalent value was received in return.  The trustee also has the power to pursue fraudulent transfers under state law, which for a case in Pennsylvania means the trustee can look back four years to identify such transfers.  The typical lien that is attacked as a fraudulent transfer is the mortgage given to a friend or family member in return for no actual money loaned or to secure some other imaginary obligation.   The lesson: know your debtor and his assets before trouble starts.

Certain Statutory Liens. Certain statutory liens are avoidable.  The bankruptcy trustee has the ability to avoid any lien for rent and the ability to avoid an unperfected or improperly filed mechanic’s lien.  The lessons: we suggest that a concerned landlord take an Article 9 security interest in the tenant’s property.  With regard to the mechanics’ lien there is simply no substitute for doing all notices “by the book” and doing them on time.

If you have a debtor in bankruptcy and the trustee is attempting to interfere with your lien, there are steps you can take. We are happy to assist (provided the case is in the Bankruptcy Courts for the Eastern or Middle District of Pennsylvania).




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