Maybe one lien in 200 will involve a bankruptcy of the prperty owner. That is, between the time you buy the lien and the time the redemption period expires, the owner files for bankruptcy. What happens to your lien if the owner files for bankruptcy? Under the bankruptcy law, once a person files for bankruptcy, the assigned federal judge will "stay" or stop all pending claims against that person and bring all actions into the judge's jurisdiction. This order will apply to all liens against that person and his assets. As a lien holder on the bankrupt person's property, you will receive a notice from the bankruptcy court to confirm your lien. The judge will separate all creditors into secured and unsecured creditors. Since you have a lien on real property, you are a secured creditor. In most cases, the judge will allow your lien to continue in first position against the property, and you will be paid your principal and the interest due. Your legal rights have not been impaired, only delayed. It is possible for the judge to order the sale of the property and pay all secured creditors only a percentage of their claims. Therefore, you want to avoid this potential risk if at all possible. The judge may only ask you to fill out form indicating what your lien is and the interest you are owed. But, if the debtor names all creditors in the petition, you will need to file an "answer" with the court setting forth your claim, which will require the services of an attorney. If your lien is small, it may not be worthwhile to even pursue the claim.
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