Although there are federal laws governing bankruptcy, each state and jurisdiction has its own practices as well. Robert Keyser shares specific information on bankruptcy law in New Jersey. “First, Bankruptcy law applies the law of the State to determine the nature and priority of your interest. The exact nature of the product that you purchase at the sale in your State (lien or deed) will determine the scope of your rights in the bankruptcy.”
Here are some of the main points that Robert points out:
- If bankruptcy was filed before a tax sale occurred and you purchased the certificate, your purchase would be considered invalid. (You can validate it after the fact, but that involves getting an Order from the Bankruptcy Court.)
- If the bankruptcy is filed after the sale and before or during the foreclosure process, additional steps must be taken but the investor’s collection will be delayed. The manner in which collection is proceeded with depends on the type of bankruptcy. However, Keyser stresses the importance of filing a “Proof of Claim” unless it is a no asset Chapter 7. In that case you will be told not to file a proof of claim. Your collection should only be delayed by a couple of months until the case is closed.
- Chapter 7–If there is equity in the real estate, the Trustee will sell that real estate for the benefit of the creditors. The tax lien investor almost always will be redeemed at the closing of that real estate. Even if it is not redeemed at closing, the lien must be satisfied in full, with interest
- Chapter 13–A chapter 13 Plan proposed by the Debtor must always satisfy the tax lien, over the life of the Plan (which may be up to sixty months), with full interest. Alternatively, the Chapter 13 Debtor may propose to sell or refinance the property, and redeem the lien at closing, again with full interest.
- Chapter 11–There is no strict rule for Chapter 11 Plans, in terms of the time frame for repayment (but be aware of the new Subchapter V Chapter 11, which is more like a Chapter 13). It may be negotiated with the creditors. Again, any Plan must provide for satisfaction of the tax sale certificate with full interest.
This is a very simplified version of Robert Keyser’s information concerning Bankruptcy law in New Jersey as it affects tax liens purchased. We recommend reading each chapter in detail in Keyser’s white paper to better understand the details. If you are interested in learning more about the New Jersey tax lien process as a whole, please check out the interview with Deborah Feldstein of Pellegrino & Feldstein, LLC.