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Introduction
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.”
Every jurisdiction has its own unique rules regarding tax sales, including those related to bankruptcy. Although there are federal laws governing bankruptcy, each state – including New Jersey – has its own practices. Robert Keyser, of the Taylor and Keyser law firm, has decades of experience with bankruptcy law in the Garden State, and is an expert on how NJ bankruptcy law can impact tax lien investors who have an interest in the property affected by the bankruptcy.
Determining Your Rights
As Keyser explains, “The exact nature of the product that you purchased at a tax sale in New Jersey, determines the scope of your rights if the property is included in a bankruptcy.” In other words, the first question to answer is whether what you bought at auction was a tax lien or a tax deed. Also, if the bankruptcy was filed in court before a tax sale occurred, and you purchased the certificate, your purchase would be considered invalid. Auctioning liens and deeds that are already involved in bankruptcy violates state statutes, rendering them erroneous – and entitling the purchaser to a refund. But it can take time for such mistakes to be corrected, and for you to get reimbursed.
Delays and Legal Interventions
There is also the possibility that you can validate the purchase after the fact, but to do so you’d have to get an official order from the bankruptcy court. Meanwhile, if bankruptcy is declared and filed after the sale and before or during the foreclosure process, additional steps must be taken for the investor to collect, and the procedure will depend on which type of bankruptcy was declared. Regardless of whether a court order is issued by the bankruptcy court and no matter what category of bankruptcy is applicable to your lien or deed, your ability to collect will suffer significant delays.
The Cost of Bankruptcy Complications
In addition to collection delays, there are the problems of the significant time and effort required to file documents and requests for collection or reimbursement. Add to that the high price of hiring lawyers to represent you in court, and it’s easy to see why tax sale investors should avoid becoming entangled in assets potentially encumbered by bankruptcy complications. As Keyser reiterates, having your money tied up in court will undermine your goals as an investor – because investors want to keep their cash liquid to continue to capitalize on the next opportunity.
Dealing with Different Types of Bankruptcy
Keyser also stresses the importance of filing a “Proof of Claim” if you hold an asset that is encumbered by bankruptcy complications, with one notable exception. If it is a “no asset” Chapter 7 bankruptcy, you don’t file a proof of claim. And, fortunately for you, your collection should only be delayed until the case is officially closed, which typically takes only a couple of months. Here are other important key distinctions:
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 will almost always 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, with full interest, over the life of the Plan (which may be up to 60 months in duration). 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 timeframe for repayment, and it may be negotiated with creditors, but must provide satisfaction of the tax sale certificate, plus full interest. (It is also noteworthy that under more recent rules regarding Subchapter V of Chapter 11 bankruptcy, is can proceed more like a Chapter 13.)
Getting Your Premium Back
In NJ, to get your premium back, you have to be redeemed inside of five years. But most bankruptcies go well beyond that, especially if the bankruptcy wasn’t even filed until a few years after you bought the certificate. To adjust for that, the period within which you can get back your premium is extended by one day for every day that the bankruptcy remains open. For example, you may get paid in full once a bankruptcy that took five years closes – even if it was seven or eight years after you bought the certificate.
The Bottom Line
“There are 567 tax districts in New Jersey who have reasonably good counsel,” adds Keyser, “and those districts are told that if they want to sell a tax lien undergoing bankruptcy, they need to get stay relief so what is purchased is valid. But many jurisdictions don’t do that.” As a result, you may find out months or years later that your asset is encumbered by bankruptcy. The big takeaway, Keyser says, is that the most important thing to know about dealing with bankruptcy in NJ, or any jurisdiction, is that you have to perform due diligence. Know your property before you get involved and tie-up your funds.
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.
There is an issue that has arisen in the past several years in the New Jersey bankruptcy Courts, involving a former property owner trying to recover property that was lost at foreclosure. That challenge to the foreclosure judgment is brought by a complaint filed in the Bankruptcy Court by the debtor (usually but not always in a Chapter 13). These are called either “voidable preference” or “fraudulent conveyance” actions (or both), brought under specific sections of the Bankruptcy Code. The complaint can be filed up to two years after the lis pendens in the foreclosure was recorded, and can be very complicated. They can be defended, but you should seek legal assistance if you are confronted with this type of action.
Summary
Keyser emphasizes, “Waiting years to get paid is not an effective use of your money, and even under the best of circumstances, bankruptcy slows you down. It also imposes a new set of rules and restrictions, and if you aren’t aware of those, you can run afoul of them.” This is an oversimplified version of how bankruptcy law works in New Jersey as explained by Keyser. But you can read an expanded explanation in his comprehensive white paper, and learn a great deal more about the NJ tax lien process from the in-depth interview with New Jersey tax expert Deborah Feldstein, of Pellegrino & Feldstein.
