Bankruptcy can help if you’re behind on real estate taxes. Chapter 7 by getting rid of other debts, Chapter 13 by buying you lots more time.
Bankruptcy Stops a Property Tax Foreclosure
Filing either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” stops a foreclosure by your property tax authority.
Filing bankruptcy stops most forms of debt collection through the “automatic stay.” In particular the automatic stay stops “any act to… enforce any lien against property of the [bankruptcy] estate” Section 362(a)(4) of the U.S. Bankruptcy Code. The bankruptcy “estate” includes all assets that you own when you file your bankruptcy case. It includes your home.
A tax authority’s foreclosure for property taxes is the enforcement of the property tax lien. That foreclosure becomes illegal as soon as your bankruptcy filing imposes the automatic stay.
So filing bankruptcy stops a tax foreclosure. What happens next?
Chapter 7: Discharge Your Other Debts to Afford Your Property Taxes
If you’ve fallen behind on your property taxes, it’s likely because you’ve had other debts that you had to pay. You didn’t have enough cash flow to pay both, and likely haven’t for quite a while.
Maybe if you wrote off (“discharged”) your debts through bankruptcy you’d have enough to start paying the property taxes. Chapter 7 is usually the quickest and cheapest way to discharge your other debts. (This assumes that you qualify, and that you don’t have other reasons to file a Chapter 13 case instead.)
Most local tax authorities don’t have the legal right to foreclose on your property until you are several years behind. Talk with your bankruptcy lawyer about this. You may have some time to catch up. On the other hand, tax foreclosure rules vary greatly, and they tend to be very strict. Once it’s too late it’s simply too late. Find out for sure where you stand on any deadlines.
Your bankruptcy lawyer should also be able to tell you whether your tax authority would likely set up a monthly payment plan for you to catch up. If so, determine whether you could afford the catch-up payments after you discharge your other debts.
In these situations filing a Chapter 7 would give you the help you need.
Chapter 7: Often Not Enough Help
But there are many situations when Chapter 7 does not solve the problem.
First, if a tax foreclosure is happening soon, you probably don’t have enough time to catch up.
Second, even if there’s no pending tax foreclosure you may need more help for the following reasons:
- Even after discharging your other debts you wouldn’t have enough money left over to satisfy your tax authority.
- The tax authority doesn’t provide a way to catch up, maybe because you’ve let the collection process go too far.
- You had a deal to catch up earlier but just didn’t have the cash flow to stick with it. Now they won’t give you another chance.
- Your mortgage lender requires you to bring the taxes current more quickly, on threat of its own foreclosure.
Chapter 13: Buy More Time and Flexibility
Under Chapter 13 you can bring your property taxes current over a period as long as 5 years. This extended period results in lower monthly catch-up payments, making more likely that you’d succeed with it. During this time you wouldn’t be at the mercy of the tax authority. While you’d be in the Chapter 13 case you’re protected against foreclosure or any other collection activity. You do need to fulfill the terms of your Chapter 13 payment plan, as you proposed and the bankruptcy court approved. But as long as you do, Chapter 13 saves you a long of anxiety. It gives you a measure of financial consistency and stability.
Chapter 13 can also save you money in very practical way. It is a very good legal mechanism for dealing with many other special debts, such as income taxes, child and spousal support, and vehicle loans. Your payment plan may allow you to catch up on the property taxes ahead of these other special debts. So you get current on your back property taxes more quickly than with a Chapter 7 case. That saves you interest on the unpaid property taxes, which are usually assessed at a relatively high rate. Drawing down the property tax debt faster also builds equity in your home faster.
Chapter 13: When Behind on Your Mortgage, Too
Unless you own your home without a mortgage, if you’re behind on your property taxes you’re likely also behind on the mortgage. Even if you are current on the mortgage, your mortgage lender is likely threatening its own foreclosure because you’re not current on the taxes. In both of these situations Chapter 13 is usually the best option. That’s because it is especially adept at handling both of these debts simultaneously.
Chapter 13 allows you to stretch out your mortgage catch-up payments up to 5 years (just like with the taxes). Most importantly, throughout this time you are protected from foreclosure by either the tax authority or your lender.
You do have to keep current on your Chapter 13 payment plan. But those payments are based on a realistic budget. They can be adjusted for both anticipated and unanticipated changes in your income and expenses.
You do also have to keep current on ongoing property taxes, so that you don’t fall further behind. Because that’s incorporated into your budget, this should not be a problem. You want to be completely current when you finish your payment plan, and you’re required to be. Chapter 13 gives you the means to do so.