As Covid-19 surges on, many businesses—especially those within the construction industry—are experiencing financial issues. Because construction projects require many different actors to work together at any given time, Covid-19 is especially problematic for those in the construction industry. For some, health precautions have just slowed down the progress at which work can be completed. The reason for this is that those who continue to have construction work must abide by the safety measures and social distancing most states now require. However, for others that were already experiencing small profit margins or for those whose projects were entirely canceled, Covid-19 may lead to bankruptcy. Further, bankruptcies are possible throughout the job site chain—though they are most common for general contractors and property owners.

While individual construction companies will go bankrupt, this is largely just a trickle-down effect. Thus, as large and small private companies go bankrupt or become more fiscally conservative, the construction industry will continue to experience prolonged slowdowns. Finally, these issues are only exasperated by lenders becoming more apprehensive about initiating new loans.

While difficult no matter the reason, below is an overview of your options if the property owner or general contractor on your job site goes bankrupt.

When the Owner or General Contractor Goes Bankrupt

If you are working on a construction project and the property owner or general contractor goes bankrupt, you will likely worry about receiving compensation.

When the property owner files for bankruptcy, the project you are working on will likely come to a complete stop. Furthermore, the property you are working on and the assets located on this property will be part of the bankruptcy. Assets that are protected by the automatic stay cannot be taken by unpaid contractors, subcontractors, or material suppliers. In this case, not only are the assets on the project property protected, however, the cash flow that funds the entire project will completely stop.

While a property owner experiencing bankruptcy almost always stops a project, there is a small chance that a surety company will take up the property owner’s financial duties if there is a surety bond in place. If a surety company takes over the project, the project will continue moving forward, just not at the same pace as before the bankruptcy.

On the other side, when a general contractor files for bankruptcy, there will be a lot of confusion between the subcontractors and material suppliers on the project. Without a singular entity distributing the work on a project, an ineffective job site will ensue and can further leave contractors searching for payment.  

If a general contractor files for bankruptcy, the subcontractors can file a mechanics lien against the property owner. A mechanics lien can easily solve non-payment problems. However, when dealing with bankruptcy, the road to payment is not as clear. Finally, the mechanic’s lien process during bankruptcy largely depends on the individual laws within your state.

Unrelated Bankruptcies

Many construction-related companies may be jumping to take on as many jobs as possible to offset lower revenues this year. However, this strategy can be destructive. First, taking on so much work that you cannot keep up with deadlines ruins your reputation within the construction industry. This can lead you to get kicked off your current work and not picking-up new jobs. Secondly, you may not vet the jobs you are working on before accepting work. If this occurs, you are increasing the likelihood of working with a property owner or general contractor that goes bankrupt. Even if you only work on one job that deals with bankruptcy, depending on the labor and material you have already invested could lead your own company to shut down.

Mechanics Liens Versus Bankruptcy Proceedings

The usefulness of a mechanics lien when a general contractor or property owner files for bankruptcy depends on state laws. However, in most cases, a mechanics lien is a useful tool.

General Contractor

If the general contractor you are working with files for bankruptcy, you can file a mechanics lien. In this situation, the automatic stay still allows subcontractors to seek compensation. Further, you must perfect the lien before the bankruptcy proceedings finish.

Property Owner

If the property owner on the job site files for bankruptcy and you submitted your mechanics lien, you will likely have to wait for the perfection of the mechanic’s lien. In this case, your lien will attach to the property yet the automatic stay protects the property.

To combat the bankruptcy protections, petition the bankruptcy court for leave so that you can pursue the lien. If the courts agree to this leave, you can pursue and perfect the lien before the bankruptcy court proceedings end.

Other Construction Companies

When another subcontractor files for bankruptcy, you can file a mechanics lien to receive payments they owe you. Finally, in this scenario, the automatic stay does not protect the owner or general contractor.

Sending Notices and Filing a Mechanics Lien

If at any point during the construction project, you are experiencing payment issues, it is best to be proactive. First, send a preliminary notice and then a mechanics lien if you still do not receive payment. This plan should push the entity that owes you money to begin the process of paying before finalizing the bankruptcy.

Contact Our DC Law Office for More Information

Finally, for more on what to do when someone on a job site goes bankrupt, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding construction law, check out our blog.