Falling behind on property taxes is serious, but not necessarily reason to rush off and sell your home.
This continues a series of blogs about why you should get advice from a bankruptcy attorney before selling your home while under financial pressure, this one particularly on getting behind on property taxes.
Property Tax—the Superior Lien
Your local property tax agency is generally the first lienholder on your home. It comes ahead of your mortgage, and anything else like judgment and income tax liens. The property tax agency has a right to foreclose on your property, and because of its superior position on the title can foreclose out even your mortgage lender. As a result, if you fall behind on property taxes, at some point the mortgage lender will usually pay the property tax to avoid losing its lien on your property. Keep in mind, also, that in California, which is where I practice, past due property taxes accrue interest at eighteen percent, a hefty rate which is set by statute.
Most mortgage documents specifically give the mortgage lender the right to pay the property tax, to add that amount to what you must pay the mortgage lender, and to start its own foreclosure against you for not paying the property taxes. That’s true even if you are current on the mortgage payments themselves, although most people have by that time also fallen behind on their mortgage. (If you are paying your property taxes in the “escrow” portion of your monthly mortgage payment, then of course you are simultaneously falling behind both on your mortgage and property taxes.)
The Temptation to Sell
So by the time you miss a payment in property taxes you are likely in serious financial trouble, and understandably may decide that you should sell your home quickly to get any of your equity out of it. And regardless whether you have any equity, you may figure you should sell, on a short sale if necessary, to prevent the home from getting foreclosed, by either the property tax agency or your lender.
Maybe that is your only choice. But maybe not.
Bankruptcy As Medicine for a Property Tax Debt
Bankruptcy can give you some powerful medicine to deal with property taxes. A Chapter 13 “adjustment of debts” in particular can give up to five years to catch up on your property taxes, while freezing both your lender’s and property tax agency’s foreclosures throughout that time. Through your Chapter 13 plan, you could earmark payments to flow relatively quickly towards catching up on your property taxes, and to your mortgage—even ahead of any back income taxes and virtually all your other creditors. Your budget would include money to pay the ongoing property taxes (and mortgage), ahead of most or all your prior creditors. So at the end of your Chapter 13 case you would be current on your property taxes and your mortgage, and otherwise debt-free.
If instead of keeping your home you do need to sell it, Chapter 13 can enable you to do so later instead of immediately. You can get more market exposure, have time to make needed repairs, or begin your sale during a better time of year. Or you may even be able to delay selling for several years until you get to a better time to do so for your family’s needs, or perhaps until the property’s value has increased.
Sell Only If, and When, It’s Right to Do So
There’s no question that falling behind in property taxes is not good, and may well be a sign that you cannot keep the property long term. But that depends on all your circumstances. Given the power of bankruptcy—both to buy time before selling and maybe to save you from needing to sell at all—it only makes sense to find out what bankruptcy may be able to do for you.