A Tax Lien Pitfall You Must Factor In When Planning Your Tax Deed Investment Strategy
January 13th, 2011
In Closter, New Jersey, the small town was set to auction off a local mall at a tax lien auction in an effort to “recoup hundreds of thousands of dollars in back taxes from…owners.” And investors were at the ready, eager to bid on the commercial property. Now, however, the entire process is stalled thanks to a last-minute bankruptcy filing by the property’s owners which effectively prevented the sale from moving forward[1].
In this case, bidders were lucky. The bankruptcy filing happened before the sale rather than immediately after. When the owner of a property saddled with delinquent property taxes files bankruptcy, the taxes are still owed. And, as a city attorney pointed out in this instance, “Those taxes have to be paid one way or another anyway.” However, a bankruptcy filing can stall your ability as the owner of a tax lien or tax deed to collect on that lien or even beginning the “countdown” process in which you must engage before a foreclosure takes place.
In the city of Closter’s case, if the taxes remain unpaid for too long, it will actually impact the city’s budget. For tax lien investors, interference with a scheduled timeline for collection or foreclosure can not only impact personal and investing budgets but also delay profits that may be important to other aspects of the business. While you can never be 100 percent sure about how a property owner will opt to deal with their delinquencies, it is important to factor in that any tax lien in which you invest could suffer a delay should that owner file bankruptcy. Being aware of this potential pitfall will help you plan your tax lien investing strategies.
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This is the first in a series of educational articles. If you have questions about tax lien or tax deed investing that you would like answered, please ask them in the comments area below.
[1] http://www.northjersey.com/realestate/113124309_Closter__seeking_to_recoup_back_tax.html
January 13th, 2011 at 11:35 AM
First of all let me point out that NJ is a lien state and not a deed state. They were auctioning of the lien not the deed.
Secondly bankruptcy is not that big a deal. If the property is in bankruptcy the municipality can not sell it in the sale. However a property could go into bankruptcy after the tax sale, once an investor has already purchased the lien. But the lien holder has to be notified and if somehow things slip through the cracks and the lien holder is not notified they can have the bankruptcy thrown out.
As you mention in the article you could have to wait longer to get paid or take less interest while the property is in bankruptcy. But in my experience most bankruptcies do not hold up. Depending on the type of bankruptcy, the property owners do not always hold up their end of the deal and the bankruptcy gets thrown out. Or sometimes people just use bankruptcy as leverage to get their mortgage company to do a workout, loan modification, or short sale that they otherwise would not agree to. Still there is the change that you may have to take less interest than you aquired the lien for, or that you will have to wait longer to get paid.
January 14th, 2011 at 5:33 AM
This oint I am very well aware.
Question is what are some of the signs to look out for , if any?
But, doesn’t the BK extend the redemtion period thus more interest acruing or penalty?
Thanks ,
Joe
Hi Joe: You’re right. It’s not necessarily a bad thing to have that lien sit around and accrue some interest! But people who run their investments on a tight timeline (like many new investors who often underestimate the amount of time they’ll need to let that lien “sit” anyway) can really get in trouble if they don’t do some due diligence or at least factor the possibility of a bankruptcy into their plans. There aren’t really a lot of “red flags” for this since just about anyone can opt to file, but it’s important to factor the possibility in when you are designing your tax lien investing strategy. Thanks for your comment and question - We appreciate your participation and are always glad to hear from you!
January 14th, 2011 at 9:00 AM
Which lien supercedes when a homeowner’s mortgage is delinquent by more than 90 days and hasn’t made any tax payments? Can the bank foreclose with delinquent tax payments due, or do they typically pay the taxes to proceed with the foreclosure?
Property tax liens come first. That’s one reason they are so popular However, often a mortgage company will pay off the lien to avoid losing the property.