The cliché goes that if you need something taken care of, fixed or solved all it takes is a bigger hammer.

When investing in tax foreclosure properties a critical part of your due diligence is to determine if:

1.    The owners of the property have filed for bankruptcy protection
2.    If the possibility exists that the property owners will file for bankruptcy while you hold tax lien certificates or tax deeds

While you have advantages and protections afforded to you as a tax foreclosure investor—like first position on a property—things can change if the property owner(s) file for bankruptcy protection.

Property taxes per se cannot be discharged which is good for the investor.  That’s your big hammer.  Another reason these investments are favored by institutional and wealthy investors.

The biggest hammer is reserved by the one agency of the government that no one loves and everyone loves to hate, the Internal Revenue Service (IRS).  It’s the one entity that can take priority over any and all lien holders.  Basically, during a bankruptcy proceeding back income taxes takes first position over your security of any tax foreclosure investment.

It’s simple, back taxes claimed by the IRS get court ordered to the first position.  Your claim via whatever tax investment you own is still valid.  However, the bigger hammer gets paid first.

Remember, this posting is NOT legal advice.  It’s a warning that in order to keep all the benefits of tax foreclosure investing there is no substitute of due diligence and sound advice of a qualified legal tax advisor.

One more cliché:  Forewarned is forearmed.