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Rising Bankruptcy: How Contractors Can Protect Themselves in the Coming Years

There have been rumblings of a recession for some time now, and contractors are doing everything they can to prepare for an economic downturn. During a recession, it’s all too common for a construction company to face bankruptcy. But contractors must always be mindful of the financial stability of the owners they contract with in addition to their own. 

Below, we discuss the possibility of a recession and what it could mean for contractors trying to secure payment on future projects. As our economy wanes, you will continue to encounter bankruptcy in the industry and the need to file a mechanic’s lien. For a legal ally who will see you through all legal challenges, partner with the Houston construction lawyers from Cotney Law. 

The Flip of a Coin 

There’s a 50 percent chance that a recession will hit in 2020. A coin flip. That’s what economists say it will come down to. “We’re at the tipping point now,” said economist Robert Shiller in an interview with Fox Business. “But it reminds me uncomfortably of 2005 when we were in the same circumstance — home prices were going up and the talk was changing.” What’s lead us to the doorstep of yet another recession? It’s hard to say, but housing slowdown and trade tensions are definitely contributing factors to the current economic downturn. 

If a recession does hit, its impact will be felt throughout the construction industry. The last time the industry dealt with a recession, the number of construction firms in operation dropped drastically and skilled workers left the industry in pursuit of stable careers. With a potential recession on the horizon, owners will be less willing to fund projects and less capable of seeing projects through to completion. 

Bottom line: A recession in 2020 will mean bankruptcy for scores of project owners. When bankruptcy does inevitably hit and an owner begins missing payments, you’ll need to know how to employ your most powerful tool for securing payment: the mechanic’s lien.

Two Types of Mechanic’s Liens in Texas 

As we’ve covered previously, Texas has some of the most complex lien laws in the nation. This process only becomes more convoluted once bankruptcy is brought into the picture. Fortunately, our Houston construction lien attorneys are here to clear things up. 

Related: Confirming Mechanic’s Lien Eligibility 

Constitutional Liens

“Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens.” 

These Texas laws pertaining to constitutional liens stipulate that a contractor who contracts directly with the owner is entitled to payment by virtue of providing work or materials. Under normal circumstances, a general contractor would be able to perfect their lien and secure payment. However, this is bankruptcy we’re talking about, and you’ll need to work even harder to get what you are owed, especially if you’re a subcontractor or materials provider. 

Statutory Liens 

In order to perfect a statutory lien, you will need to complete and submit an affidavit including, among other information, the claim amount, a description of the work/materials provided, and a description of the property to the county clerk in the county where the property is located. We’ve covered notice requirements and deadlines in a previous article and encourage you to follow the link below to learn more about the mechanic’s lien process.

Related: The Intricacies of Filing a Mechanic’s Lien in Texas 

If filing a statutory lien is so complicated, why do it? First, only those who have contracted directly with the owner can benefit from a constitutional lien. Second, a statutory lien has the teeth to ensure that you receive payment from a bankrupt owner. 

Mechanic’s Liens vs Bankruptcy  

It all comes down to power. Owners who file for bankruptcy are given “strong-arm” powers that protect them from creditors. Essentially, they are allowed to avoid transfers under applicable state law. Section 544 of the Bankruptcy Code states that

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—

(3)  a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

Lucky for contractors, a statutory lien circumvents these strong-arm powers by being recorded in the county’s real property records. Without a statutory lien, contractors are no different than other creditors made powerless when an owner declares bankruptcy and is given the rights of a lien creditor. 

Related: Mechanic’s Lien Deadlines

A Loyal Ally to Protect Your Business 

The best thing you can do to protect your company in the coming years is to partner with a Houston construction lien attorney who can properly file liens on your behalf and ensure that your lien rights are always defended and enforced. With Cotney Law, you can be sure that nothing, not even bankruptcy, will get in the way of retrieving your owed payment. For a loyal ally who will stick with you through hell or high water, partner with the team of Houston construction lien attorneys from Cotney Law. 

If you would like to speak with a Houston construction lawyer, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.