It happens very rarely, but it does happen. You won your tax lien bid and all that's left is to wait out the redemption period and collect your money. It's all humming along good and as it should. At least, it is until you find out that the property owner has filed for bankruptcy. Thoughts of lost money may have you feeling distressed, but don't panic yet. When it comes to tax liens, there are 3 things you should know about bankruptcy.
Keep in mind, that when a property owner files for bankruptcy during the redemption period of a lien, it is a federal judge that decides how all outstanding debts are to be handled.
The 3 Things You Should Know
1. You Are Secured. The first thing that happens is that a court issued stay is put on all claims against the person filing for bankruptcy. Creditors are labeled either secured or unsecured. As you have a first position lien, you are deemed a secured creditor, and you have a place in line ahead of the bank that holds the mortgage on the property.
2. You Might Be Secured. Usually what happens is that the judge will allow things to remain as they were. You will be eligible to collect your original investment plus interest. There is no guarantee, however. It is within the judge's rights to mandate that the property be sold, with the resulting funds being used to partially pay all the secured creditors. In this case, you may not receive all of your money. This is not a typical treatment of these matters, but you should know that it can happen.
3. An Ounce of Prevention. Once you are in this type of situation, you are at the mercy of the court. The time to take measures of protection is before you purchase. Your risk of buying a lien that could end in bankruptcy court is higher on properties from run down areas. Look for more expensive liens on pricier properties. The higher end properties seldom go into bankruptcy.
No matter where you purchase liens, the chance of having your tax lien investment end up in bankruptcy court is remote, probably no more than one in 250 properties that you by liens on. Still, you need to know about this risk. As with everything else in life, the more you know, the better your decisions are likely to be. Being better informed will also help keep panic at bay if something like bankruptcy does arise.
There are at least two things you can do to educate yourself. First of all, go back to the top of this article - Tax Liens - 3 Things You Should Know About Bankruptcy - and read it again. Then get some solid information that you can review. You should do those things right now, before you even think about going to another tax lien auction. By the time you've read and digested both, you will be a very well informed tax lien investor and well on your way to making a lot of money.
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