If you need to stop a Property Tax foreclosure Bankruptcy may be your best option. When you don’t pay property taxes, investors purchase the property taxes and then foreclose. Often debt collection attorneys will purchase tax liens by setting up a company that purchases the property tax lien. Then they charge 250 per hour for attorney fees or more when the company forecloses. In effect, they buy the tax debt, earn 12% interest plus thousands more in attorney fees and costs when they file the foreclosure
If you fall behind in the insurance or property taxes, the lender will often pay the property taxes for you. However, taxes and forced placed insurance are repaid at a higher rate than you may have normally paid. Being behind on taxes or insurance may place you in default or foreclosure from the mortgage company. It is often a part of the note, not paying the insurance or taxes is a default which can trigger foreclosure. Even if you are current on the mortgage payments, the mortgage company can foreclose for nonpayment of the taxes and insurance.
The county can also foreclose on a tax debt. But it normally takes years before enough taxes pile up for the county to foreclose. Instead, these debts are normally bought up by investors and the mortgage company because they can make money from it.
How to solve property tax foreclosures Chapter 7 or 13
Your budget has to include property taxes and insurance for your home. If you forget to budget for this, you have to fix the problem. If you simply need to get rid of unsecured debts which prevent you from paying taxes on time a Chapter 7 can free up cash. By improving your cash flow, you can apply money to the property taxes and pay it off. Sometimes a simple Chapter 7 is enough. But remember in a Chapter 7 you are limited in the amount of equity you can keep in a home. Chapter 7 also avoids a tax and a deficiency debt.
Bankruptcy may be your only option when you are facing an immediate property tax foreclosure. Chapter 13 may be required to stop the sale. Chapter 13 can give you up to five years to pay off the taxes. A Chapter 7 will delay the sale for about 4-6 months. Chapter 13 payments may be very low, but your budget must include paying these taxes, or you will eventually go back into another foreclosure for the same reason. Paying back taxes in a 13 requires you pay the interest during what is often a five-year plan. A Chapter 13 gives you time but not if you return to not paying the property taxes.
Property Taxes are statutory taxes
Because property taxes are statutory taxes, you can’t strip or discharge the tax in bankruptcy. You can only repay property taxes whether they are owned by the county, mortgage company or an investor. Property tax liens attach to the home or real property just like a super first mortgage which must be paid even before the first mortgage is paid. Tax liens place the mortgage company at risk if these taxes pile up. Property taxes are also paid before judgment liens are paid in a foreclosure.
Property tax liens cannot be avoided or stripped in bankruptcy court. They can only be repaid. But you can repay them over time, and unsecured debts may be paid far less. For instance, if you have property taxes and a first mortgage, there may be no equity for a second mortgage which may be treated like a credit card and discharged.
Only tax liens and a residential first mortgages are protected in bankruptcy from being stripped or modified. A rental or vacation home can have a first mortgage modified if it is not fully secured. Chapter 13 gives you the ability to
- repay the property tax liens over time
- eliminate other debts
- sometimes strip a mortgage
- protect a comaker
You never lose a home in Chapter 13 to the Trustee
One of the nice things about a Chapter 13 is how you never lose property to the court or a trustee. In a Chapter 13 people may not make the home mortgage payments or plan payments and have a home go back to foreclosure. But they don’t lose a home just because they had too much equity. Instead, if you have too much equity the monthly payment is normally increased, and the plan may become a 100% plan. The plan has to repay secured and priority debts in full. But it also must repay as much as a Chapter 7 would have.
Income taxes less than three years old are priority debts. The payments may be too high if you have substantial property or secured and priority debts. But you are never forced to turn over property in Chapter 13.
An experienced attorney will put together a budget designed to include future property taxes. Even if there are unexpected changes, you can modify the plan. The goal of the plan is to eliminate the unsecured debt, and at the end of the plan you have caught up all of the secured debt. Including the property taxes.