Falling behind on property taxes can have serious consequences, but does not necessarily mean you should hurry to sell your home.
Property Tax—the Superior Lien
Your local property tax agency usually holds the first lien on your home. That lien comes ahead even of your mortgage. And it’s way ahead of other debts on your home’s title, like creditor judgment liens and IRS and state income tax liens.
Your property tax agency can foreclose on and seize your property if you don’t pay the property taxes. And because of its superior position on the title, the property tax agency can not only take the home away from you but at least theoretically also from your mortgage lender. So if you fall behind on property taxes, at some point the mortgage lender will usually pay the back property taxes to preserve its own rights to your property.
If your mortgage lender does pay some of your property taxes you can bet it will add the amount to your mortgage debt. Most conventional mortgage documents specifically give the mortgage lender the right to pay the property tax, then add that amount to the arrearage that you must pay to the mortgage lender to get current. Indeed your mortgage lender very likely has the right to begin its own foreclosure against your home simply for you being behind on your property taxes.
Much of the time those who fall behind on property taxes are also struggling to pay their mortgage, so the homeowner is usually behind on both and is being foreclosed on for both reasons.
The Temptation to Sell
So, if you’ve fallen behind on property taxes you are likely in serious financial trouble. You understandably may decide that you should sell your home quickly to get any of your equity out of it. And if you don’t have any equity, you may still decide to sell, through a short sale if necessary, to prevent the home from getting foreclosed by either the property tax agency or your lender.
Selling your home, and selling it fast, may be best for you in this situation. But maybe not.
Bankruptcy as the Solution if You Fall Behind on Property Taxes
The last half-dozen or so of our blog posts have been about some of the powerful ways that filing Chapter 7 or Chapter 13 can let you keep your home or sell it later when you are ready to do so.
Very briefly, Chapter 7 “straight bankruptcy” gets rid of most or all of your other debts so that you can focus your financial resources on your home—on the property taxes and the mortgage(s). Chapter 13 “adjustment of debts” gives you years to catch up on the unpaid property taxes and on any mortgage payments, while protecting you and your home from either creditor’s foreclosure or other collection efforts. Chapter 13 also has creative ways of dealing with certain second or third mortgages, income tax and child support liens, and other home-based debts, all of which can greatly help you catch up and keep current on your property taxes.
If you don’t want to keep your home but instead sell it, bankruptcy can buy you enough time to do so later instead of immediately. Chapter 7 likely buys you only a couple months, although more if your attorney can convince your mortgage lender. Depending on all the circumstances, Chapter 13 can delay your sale by anywhere from a few months to as long as five years. Either way you can get more market exposure and so would more likely get the highest price. You’d have more time to make any needed repairs or renovations, or to put your house on the market at the most favorable time. And beyond straight financial considerations, you’d more likely be able to market and sell your home whenever doing so best fits within your family and/or personal circumstances.
Sell Only If, and When, It’s Right for You
Falling behind on property taxes is not good. It could be a sign that you can’t afford to keep the property long term. But that depends on all your circumstances. Given the power of bankruptcy, find out what it can do for you and your home.