Can I Discharge a Michigan Construction Lien in Bankruptcy?

 

Michigan law allows for the perfection of construction liens upon your property by contractors and construction service providers in order to secure your payment to them.

A Michigan construction lien, however, is available only to contractors or design professionals under the right licensing and contractual circumstances.

As a property owner facing overwhelming debt, the question for you may be whether or not you can discharge or “strip” a Michigan construction lien in a Chapter 7 or Chapter 13 bankruptcy.

The answer will be, “It depends,” as is so often the case with legal questions.

This Article, however, will describe Michigan law concerning the placement or perfection of construction liens upon your property—and the extent to which bankruptcy may help you to deal with such liens.

First, however, what is a construction lien?

 

Michigan Construction Liens Explained

 

A construction lien is a mechanism created by Michigan statute that allows for builders or designers to secure payment of their costs and fees.

It is an encumbrance that is filed with Wayne, Macomb, Oakland, Washtenaw, Genesee, or other County Register of Deeds that burdens the title to the property with the debt amount claimed to be owed.

If you sell your home with a construction lien encumbering the title, the sales proceeds for the home would need to satisfy that lien amount (i.e., you’d have to pay the lien amount to the lienholder) before you receive the remaining sales proceeds—if any.

Construction lien rights are available only to those who carefully follow the procedures required in the Michigan Construction Lien Act (CLA).

This statute requires such liens to be filed by the right service providers, with the right forms, with the right notice to property owners, in transactional relationships memorialized in written contracts only, and within certain timeframes only.

 

Who Can File a Michigan Construction Lien and When?

 

A construction lien can be filed by the following building or construction professionals:

 

• Contractors
• Subcontractors
• Suppliers
• Laborers
• Design Professionals (Interior Designers, Architects, Engineers, Surveyors)

 

In order for any of these parties to perfect a construction lien for a residential building or renovation project, they must all have a written contract with you—including any revisions, amendments, or change orders.

Additionally, residential building professionals must also be licensed with the State of Michigan to file and perfect a construction lien.

Unlicensed “handyman” types who work by verbal agreement for cash sums cannot file construction liens in Michigan.

A construction lien can be filed no later than 90 days from the date on which the last work was performed by the construction professional, presuming the right Notice was filed by the builder upon outset of the project as required by the CLA.

Construction liens remain available to construction professionals even when a property owner halts a project or disagrees on some point regarding the performance of the work.

 

Michigan Construction Liens in Bankruptcy

 

Chapter 7 and Chapter 13 bankruptcy allow the stripping off or the modification of a variety of types of liens, to varying extents depending on the timing of the filing of the bankruptcy case and the Chapter under which it is filed.

The first thing that is worth knowing, however, is that, immediately upon filing either a Chapter 7 or Chapter 13 bankruptcy case, a Federal legal injunction known as the “Automatic Stay Against Collections” is enforced. This Automatic Stay in bankruptcy prohibits the collection activity of most creditors for the duration of the bankruptcy case.

One of the forms of activity prohibited by the Automatic Stay, generally, is the perfection of liens against the property of the filing debtor (you). This is because: A) the debt will usually be discharged; and B) because your property becomes property of what is called the Bankruptcy Estate for the duration of the process. Property of the Bankruptcy Estate is entrusted to either the Chapter 7 or Chapter 13 Trustee attached to the case.

 

Construction Liens and the Bankruptcy Automatic Stay

 

Creditors’ attempts to collect or attach property of the Bankruptcy Estate is a violation of the Automatic Stay and subjects the creditor attempting such action to serious court sanction.

Construction liens are treated barred by the Automatic Stay with more nuance, however.

If you are the property owner, the Automatic Stay halts any enforcement of the construction lien. However, a lien that has not been “perfected” (filed) prior to the filing of the bankruptcy case is still possible for the construction professional under the right timing circumstances.

One provision of the US Bankruptcy Code lists exceptions to the Automatic Stay. Child support collections, for example, and criminal penalty enforcement are not subject to the Automatic Stay.

Likewise, any act to perfect an interest in property in which is not subject to the Automatic Stay provided the Chapter 7 or Chapter 13 Trustee’s interest is subject to perfection under Michigan state law.

A coordinate provision of the Code elaborates, stating that Michigan state law applies in this sense if the property right (the right to enforce the Construction Lien) was engaged prior to the date on which the bankruptcy case was filed, the rights of the Chapter 7 or Chapter 13 Trustee are subsidiary to the building professional’s right to perfect its lien.

The first date on which a Michigan construction lien can be enforced is the date on which the first work or improvement to the property is made.

So long as the builder’s work on the property did not commence after the filing of the Chapter 7 or Chapter 13 bankruptcy case, the construction lien can still be perfected—presuming the contract was also signed prior to the filing of the bankruptcy cases.

 

Construction Lien Foreclosure and Motions for Relief from the Automatic Stay

 

It is important to remember regarding the Automatic Stay is that, even where it is effective against a creditor’s collection attempts, it can still be lifted by court order at the request of the creditor, under certain circumstances.

Specifically, secured creditors have the right to file a Motion for Relief from the Automatic Stay to proceed with their in rem (property) remedies as entitled under Michigan state law.

A “secured” creditor is one whose debt is “secured” by, yes, a properly perfected lien.

Thus, if you are 9 months delinquent in your mortgage payments and you file for Chapter 7 bankruptcy, the  secured mortgage servicer or holder cannot immediately foreclose your home.

However, that mortgage service does retain the right to file a motion with the Bankruptcy Court requesting an order lifting the Automatic Stay to allow it to do so. (It would never have right to have the Stay lifted in order to sue you personally for a money judgment, however.)

This all applies to construction professionals holding valid construction liens as well. The underlying debt that you owe the builder or designer may be dischargeable in Chapter 7—but the properly perfected, pre-bankruptcy lien would remain in place.

 

What To Do About Construction Liens in Chapter 7 Bankruptcy?

 

A Michigan construction lien is referred to, in bankruptcy case-law, as a “statutory lien.” This is, as explained above, because it is a lien right created by Michigan statute. Alternatively, a mortgage, for example, is a “consensual lien.” You consent to a mortgage encumbrance when you sign a mortgage document in a real estate purchase transaction.

Typically, in Chapter 7 bankruptcy, you as debtor do not have a lot of leeway to strip off, avoid (get rid of), or modify liens or other encumbrances upon your property.

Your property, in Chapter 7, is worth what it’s worth in fair-market terms for exemption purposes, including the presence of liens perfected prior to the filing of the bankruptcy case.

If you can exempt your property from the Bankruptcy Estate and protect it from liquidation by the Chapter 7 Trustee, that is usually the best you can do in this particular process.

Statutory liens are usually avoidable by the Chapter 7 Trustee under certain circumstances outlined in the Bankruptcy Code, however.

Thus, one of the jobs your Michigan bankruptcy attorney has, in preparing to file your case, is to ensure that the equity value of your home, including the negative value of any statutory or other liens encumbering its title, is fully exemptible. This analysis must consider whether the Chapter 7 Trustee will be able to avoid any statutory liens in place.

As described above, however, the Chapter 7 Trustee’s can be subordinate to a perfected construction lien or a right to perfect a construction lien.

What’s important to keep in mind if you’re hoping to file Chapter 7 bankruptcy and also retain your real estate is:

• A construction lien can affect your presumed valuation of the real estate;
• A construction lien can survive a Chapter 7 bankruptcy and continue to subject your property to foreclosure proceeding.

 

Michigan Construction Liens in Chapter 13 Bankruptcy

 

So what about Chapter 13 bankruptcy? What can it do if you have a construction lien in place?

The short answer: much.

Everything regarding the ineffectiveness of Chapter 7 bankruptcy when it comes to Michigan construction liens above does not apply to Chapter 13 bankruptcy.

Chapter 13 bankruptcy is known as a “reorganization bankruptcy.” It is specifically designed to allow you to “reorganize” your debt, to pay secured creditors ahead of unsecured creditors, and even to strip off or avoid liens.

With the assistance of an experienced Metro Detroit bankruptcy lawyer, you can, in Chapter 13, draft and file with the Bankruptcy Court a Chapter 13 payment plan repays the debt owed to a secured construction service creditor over as many as 5 years.

If your Chapter 13 Plan proposes this and the Plan is confirmed (approved) by the Bankruptcy Court, the lienholder will not be able to have the Automatic Stay lifted to proceed with a foreclosure.

Further, if your property is worth less than is owed on a first mortgage (recorded before the date of first improvement on the property by the construction lienholder), you may be able to “strip” the construction lien entirely and treat the debt owed to the construction professional as an unsecured debt, last in priority to be paid along with credit card and medical debt.

Chapter 13 bankruptcy is a powerful tool in such circumstances.

 

Construction Liens and Michigan Bankruptcy: The Bottom Line

 

It is, finally, worth noting that, if you dispute that amount owed to the construction lienholder, the filing of a bankruptcy does not prevent you from continuing that dispute. You would, instead of immediately taking the matter before a Michigan state court judge, instead, file a Motion with the Bankruptcy Court to have the classification of the debt determined to be unsecured rather than secured and for further relief as needed.

If your property is subject to a Michigan construction lien and you are considering filing for bankruptcy, it is essential that you retain an experienced bankruptcy attorney to assist you.

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Detroit-area Chapter 7 and Chapter 13 clients for over 30 years.

Contact us now to schedule your free initial consultation.