You get a letter from a federal bankruptcy court with your buyer's name on it. Your first instinct is to call them. Don't. The rules changed the minute they filed, and breaking them can cost you money.
I spent about five years working in mortgage default before I started buying land notes. Bankruptcy sounds like the end of a note. Usually it is a delay, and sometimes a haircut. Here is how it works when the collateral is land.
What happens the day my buyer files bankruptcy?
An automatic stay stops all collection, including foreclosure, the moment the case is filed.
The automatic stay (11 U.S.C. § 362) bars you from calling for payment, sending demand letters, charging late fees as a collection step, or holding a foreclosure sale. It applies even if you did not know about the filing yet. Once you know, stop, tell your servicer the same day, and if a foreclosure sale is scheduled, have your attorney stop it. Taking a collection step after you know about the stay can expose you to damages.
Does bankruptcy wipe out my note?
It can wipe out the buyer's personal liability, but your lien on the land survives.
A discharge ends the buyer's personal obligation to pay. It does not erase your mortgage or deed of trust. The U.S. Supreme Court held in Johnson v. Home State Bank (1991) that a mortgage lien survives a Chapter 7 discharge. After the case, the buyer either keeps paying to keep the land, or you can foreclose on the land itself.
Takeaway: your security instrument is what protects you in bankruptcy. A land contract or an unsecured note does not protect you the same way.
What is the difference between Chapter 7 and Chapter 13 for my note?
Chapter 7 is a liquidation that usually ends in a few months. Chapter 13 is a three to five year repayment plan that can rewrite your loan.
| Chapter 7 | Chapter 13 | |
|---|---|---|
| What it is | Liquidation: a trustee sells assets with equity, debts are discharged | Repayment plan over 3 to 5 years |
| What happens to the land | The buyer keeps paying, surrenders it, or the trustee sells it if there is equity above your lien | The buyer usually keeps it and pays through the plan |
| Missed payments | Not cured by the case | Can be caught up through the plan |
| Can your loan be changed? | No, the lien passes through | Yes, on land that is not the buyer's home (cramdown) |
| Your main job | Watch for surrender or a trustee sale; ask for relief from the stay if needed | File a proof of claim and check the plan's value and rate |
Can a Chapter 13 plan cut what I am owed?
Yes. On vacant land, a plan can limit your secured claim to what the land is worth.
The Bankruptcy Code protects loans secured only by the buyer's principal residence from being changed in Chapter 13 (11 U.S.C. § 1322(b)(2)). Vacant land is not a principal residence. So the plan can split your claim in two: a secured part equal to the land's value, paid with interest, and an unsecured part for the rest, which often gets paid pennies on the dollar. The plan can also change the rate and the term.
That is why the amount of equity behind your note matters so much. An illustration, not a real deal:
| Balance owed | Land value | Secured claim | Unsecured claim | |
|---|---|---|---|---|
| Plenty of equity | $40,000 | $65,000 | $40,000 | $0 |
| Thin equity | $40,000 | $30,000 | $30,000 | $10,000 |
Takeaway: a buyer who put real money down protects you in a bankruptcy, not just in a foreclosure. It is one reason we buy land notes at 65% of the land's value or less.
Holding a land note with a problem?
We buy performing and non performing land notes. Send the note and payment history for a bid.
Get a Free QuoteSell Your NoteWhat should I do when my buyer files?
Stop collecting, get the case number, file a proof of claim, and hire a bankruptcy attorney who represents creditors.
- Stop all collection and tell your servicer in writing.
- Get the case number and chapter from the court notice or from PACER, the federal court records system.
- File a proof of claim with the note, the recorded mortgage or deed of trust, and the payment history. In Chapter 13, most creditors must file within 70 days of the filing date (Federal Rule of Bankruptcy Procedure 3002(c)).
- Read the plan in a Chapter 13. If it values the land too low or sets a rate too low, your attorney can object before the plan is confirmed.
- Ask about relief from the stay if the buyer is not paying and there is no equity for them to protect (11 U.S.C. § 362(d)).
- Keep checking the property taxes. Unpaid taxes can get ahead of you during a long case. See what if my land buyer stops paying property taxes.
What if I sold on a land contract?
Then the outcome is less certain, because courts may treat a land contract as a contract the buyer can keep or reject, or as a mortgage, depending on the state.
With a mortgage or deed of trust, you are a secured creditor with a recorded lien, full stop. With a land contract, you can end up arguing about what the contract even is before you get to what you are owed. That uncertainty is one reason we do not buy land contracts. See why to avoid land contracts.
Can I sell a note while my buyer is in bankruptcy?
A note can be sold during a bankruptcy, and the new holder steps into your claim by filing a transfer of claim with the court.
Not every note buyer will buy a note in an active case, so ask up front. Send the case number and chapter with the note and payment history. If the case is closed and the buyer stopped paying, read how to sell a non performing land note.
This post is general information, not legal or tax advice. State law controls, and your own note and mortgage or deed of trust control. Talk to an attorney in the property's state before you act.
Frequently Asked Questions
What happens when my land buyer files bankruptcy?
An automatic stay starts the moment the case is filed. You must stop calls, demand letters, and any foreclosure until the court lifts the stay or the case ends.
Does bankruptcy wipe out my land note?
It can wipe out the buyer's personal liability, but your mortgage or deed of trust on the land survives. The U.S. Supreme Court confirmed this in Johnson v. Home State Bank (1991).
Can a Chapter 13 plan reduce what I am owed on vacant land?
Yes. The protection against cramdown covers only loans secured by the buyer's principal residence. On vacant land, a plan can limit your secured claim to the land's value.
When do I have to file a proof of claim?
In a Chapter 13 case, most creditors must file within 70 days of the filing date under Federal Rule of Bankruptcy Procedure 3002(c). In a Chapter 7 case with no assets, the court may tell you not to file until it sets a deadline.