Tax Lien Foreclosures and Bankruptcy
Due diligence - do it and do it well. For unsuspecting tax lien investors who have not done their research, they might be surprised to learn that while property tax liens have very high priority, in certain circumstances, a bankruptcy can wreak havoc on their investment.
It should be noted that bankruptcy courts often respect property tax liens and give them high priority in the administration of a bankruptcy estate. However, under certain rare circumstances - Chapter 7 - the bankruptcy trustee may subordinate the tax lien to the administration of the estate, effectively extinguishing the tax lien. In effect, a tax lien investor could end up an unsecured creditor - a far cry from the 16% return or title to the property that investors believed they would receive.
This is a pretty rare situation, but one tax lien investors should be aware of. In all instances, as part of a tax lien investors' due diligence, they need to determine if the subject property is subject to an automatic stay by a bankruptcy court. By consulting a title company, the county recorder, and the bankruptcy court, an investor can easily avoid such a scenario.
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