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Bankruptcy Stops a Property Tax Foreclosure

August 5th, 2019 at 7:00 am

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.

 

Protecting Your Home Equity through Chapter 7

July 1st, 2019 at 7:00 am

You can protect the equity in your home if the amount of equity is no more than the homestead exemption applicable to residents of your state. 


 

Our last two blog posts outlined 15 separate ways that bankruptcy can protect your home now and/or in the future. We’ll be explaining each one of these ways in 15 separate blog posts. Here is the first one—protecting present and future equity in your home through Chapter 7 “straight bankruptcy.”

Property Exemptions in General in Bankruptcy

When you file a bankruptcy case, your assets are protected through a set of “exemptions.” “Exemptions” are categories of your assets that are protected for you from your creditors. Each category usually has maximum dollar limits. (See Section 522 on “Exemptions” in the U.S. Bankruptcy Code.)

Exemptions work somewhat differently in Chapter 7 and Chapter 13. Focusing today on Chapter 7, this is a “liquidation” form of bankruptcy. This means in theory that the Chapter 7 trustee takes—liquidates—anything you own not fitting within an exemption. 

However, the practical effect of exemptions is that most people filing under Chapter 7 get to keep everything they own.

The Homestead Exemption

The homestead exemption determines how much equity in your home you can protect from your creditors. As long as the amount of equity is no more than the homestead exemption amount, your home is safe in a Chapter 7 case.

As a quick example, assume your home is worth $300,000, you owe $265,000, so you have equity of $35,000. If the homestead exemption applicable to your state is $35,000 or more, your home is protected.

This means that your Chapter 7 trustee can’t take the home and sell it to pay the equity over to your creditors.

If you have too much equity, you wouldn’t be filing under Chapter 7. Not if you want to keep your home. See next week’s blog post about preserving home equity that’s more than your homestead exemption through Chapter 13.   

Federal vs. State Exemptions

Bankruptcy law provides a set of federal exemptions, while each state has its own set of exemptions as well. All have a homestead exemption. Can you use either the state or federal homestead exemption? If so, which should you use?

At the outset, since bankruptcy is a federal procedure why is state exemption law applicable at all?                                                    

The U.S. Constitution made bankruptcy a federal procedure to make it uniform throughout the country.  See Article I, Section 8, Clause 3 of the Constitution. But there are many areas in bankruptcy where state laws apply. One such broad area is property law. In an interesting compromise, Congress gave each state the power to require its residents to use that state’s set of exemptions instead of the federal ones. Section 522(b)(2) of the Bankruptcy Code.

So 31 states have decided you must use the state law exemptions. In the remaining 19 states you can use either the state or federal bankruptcy exemptions. Since the list is shorter these 19 states that give you a choice are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

The Amount of Your Homestead Exemption

The homestead exemption amounts vary greatly state to state. For example, Kentucky’s homestead exemption protects only $5,000 in value or equity for an individual homeowner. On the opposite extreme, Nevada’s homestead exemption is $550,000. Plus a number of states—including Texas and Florida– have no dollar limit at all (although do have acreage limitations).

This can get quite complicated. For example, Kentucky residents can chose to use the federal homestead exemption instead of the modest state exemption.  But in all states you can’t pick and choose between the various federal and state exemptions. Section 522(b)(1) of the Bankruptcy Code. If you are in a state where you can use the federal homestead exemption, you can’t use any of the state exemptions that might be better for another category of assets. In the example of Nevada and Florida residents, who have such a large or unlimited homestead exemption, if they use that advantageous state homestead exemption they must use their state’s exemptions even if the federal ones may be better in other property categories.

Also, you can’t move to a new state and immediately claim that state’s generous homestead exemption. You must be “domiciled” in your new state for 730 days, or two years. Section 522(b)(3) of the Bankruptcy Code

Finally, your homestead exemption might be limited by a federal cap on the amount you can clam if you bought your home within 1,215 days (3-years and 4 months) before filing bankruptcy. Section 522(p) of the Bankruptcy Code. Effective April 1, 2019 (and for 3 years thereafter), this cap amount is $170,350. This is relevant only if your state homestead exemption is larger than this relatively large amount.

Need Legal Advice

There are other potential complications, depending on your situation. For example, what qualifies as a “homestead” to which you can apply the homestead exemption? What if you’re not on the title but instead buying a home on contract? What about leasehold interests you may have?  What happens if you own the property with your spouse, or with somebody else?

Your homestead exemption situation could well be very straightforward. But it may not be, even when it seems like it is. You need to get legal advice about this. It would be one of the first topics you would cover with your bankruptcy lawyer, and hopefully get reassured about.

Bankruptcy—including Chapter 7—can be a great way to protect present and future equity in your home. But it’s crucial to know for sure which homestead exemption applies to you, and whether it will definitely protect your home.

 

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210-342-3400

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