When you’re in a position to have people owing you money (which is definitely preferable to owing other people money!), one thing you risk is that your debtors could declare bankruptcy. If this happens and they list you as a creditor, you will receive a bankruptcy notice, letting you file a claim against the debtor’s assets. (If you’re not listed as a creditor, don’t despair – this means that the debtor’s obligations to you will not be discharged).
How much you’re able to recover depends on what type of bankruptcy filings by state are filed (and of course, whether it is successful). In a chapter 7, any discovered assets will be used to pay off debts, but you’re likely to receive pennies on the dollar. In chapter 13, debt is being reorganized rather than discharged, so a payment plan will be arranged.
Once you’ve received a bankruptcy notice, you are legally required to immediately cease any attempts to collect any monies owed; you should not contact the debtor in any way.
If you own a house and your tenant files for bankruptcy, it may or may not affect you. If the tenant continues to pay rent, you likely will not even know about the bankruptcy. If your tenant is behind in the rent, but you have not yet taken legal action against him, you may not now pursue an eviction notice unless you are able to have the automatic stay lifted; however, if the tenant does not now begin paying rent again, you can evict him based on payments missed since the filing, as this debt is not covered by the bankruptcy. If you already obtained a judgement to have the tenant removed before the bankruptcy, then the filing has no effect on you and you may continue with the eviction proceedings.
For more information about investment properties, check out twentiesretirement.com.