Will I Get Paid If My Subcontractor Files Bankruptcy?
There are a lot of moving parts in a large construction project. If one party files for bankruptcy, it doesn’t take long for others involved in the project to feel a trickle-down effect.
When one subcontractor files for bankruptcy, it can disrupt an entire project and leave the other contractors in a serious lurch, scrambling to find a replacement. If a subcontractor files for bankruptcy, you may get paid, eventually, but it will depend on the legal steps you have taken before the subcontractor filed.
Understanding How Bankruptcy Works for Creditors
Bankruptcy laws strive to treat all creditors, within each class, equally. There are several different types of bankruptcy, but the most common for contractors are Chapter 7 and Chapter 11.
Chapter 7 — When a company or contractor files a Chapter 7 bankruptcy, it usually means they’re closing their doors and liquidating their assets to pay creditors.
Chapter 11 — This type of bankruptcy is designed to help a debtor reorganize its financial affairs and return to business.
Overall, creditors usually fare better when the debtor files Chapter 11 because the debtor is motivated to protect their reputation and continue making money. The bankruptcy court will supervise the continuation of the debtors' business until all debts are paid or discharged. Unfortunately, it’s common for Chapter 11 plans to fail and convert to a Chapter 7 bankruptcy.
Debts owed to creditors are classified as secured, administrative, priority unsecured, or general unsecured. Secured claims, in the context of a subcontractor, would be a debt secured with a pre-existing mechanic lien against real property. Secured debts have the greatest chance of recovery, but the odds of full recovery diminish as you go down the list.
The Value of a Mechanic Lien
A mechanic lien offers the best defense against the bankruptcy of a contractor or subcontractor. If the lien is properly filed, it elevates your claim to secure status, increasing the likelihood that you’ll get paid in the bankruptcy process. It also allows you to foreclose on the property and collect the money to settle your debt.
Who can file a mechanic lien?
Contractors or subcontractors who improve real property in the state of Oklahoma are entitled to file a mechanic lien to collect money they’re owed in the event of nonpayment, bankruptcy related or otherwise.
Reasons you may NOT want to file a lien some professionals avoid mechanics liens
There are a few reasons why you may not want to exercise your lien rights, including,
You don’t have accurate information about the property you’re filing against
You missed your lien filing deadline
There’s not enough equity in the property to pay what you’re owed
You waived your lien rights
Before considering filing a mechanic lien after a subcontractor files for bankruptcy, consult with your attorney to decide whether filing is the right business decision.
What actions should I take if I receive a notice of bankruptcy?
When you receive notice or become aware of bankruptcy being filed by a party on your project, you should get in touch with your attorney to clarify your rights and what steps you should take next. Contact Daffern Law Firm to review your rights and any actions you need to take to secure your status in the bankruptcy proceedings.
