A Fresh Start with Unpaid Property Taxes on Your Home
Falling behind on property taxes is dangerous, and scares your mortgage lender. Bankruptcy can help you deal with both.
Is Chapter 7 “Straight Bankruptcy” Enough Help?
It possibly can give you enough of a fresh start with your other debts so that you can catch up on your property taxes. But doing so while keeping your mortgage lender also satisfied is difficult to pull off.
If you’ve fallen behind on your property taxes, sometimes just writing off your other debts would give you enough financial breathing space so that you could catch up on your property taxes. Tax foreclosures usually don’t happen until you’re years behind, so you may have a fair amount of time to get current.
So find out from your attorney how much time you would have to catch up. Some tax creditors will set up a monthly payment plan with you. Find out if that would be available to you and if you could afford the payments once you discharged (wrote off) your other debts.
If so, a Chapter 7 “straight bankruptcy” might give you the help you need.
Frightening Your Mortgage Lender
But the biggest practical problem in this is usually your mortgage lender. Even if losing your home from a property tax foreclosure is years away, falling behind on your property taxes gets your mortgage lender excited, in a bad way. Enough so that it threatens to or starts its own foreclosure, usually a much faster procedure for losing your home.
Your mortgage lender gets anxious if you fall behind on property taxes because:
- The lien that the property tax creditor has on your home comes ahead of the mortgage lender’s lien. This means that your lender would lose its own rights to your home in the event of a property tax foreclosure. That’s your lender’s worst nightmare and it will do anything to prevent that.
- Your contract with your mortgage lender requires you to keep current on the property taxes. So you are in violation of that contract by falling behind on the taxes, even if you are current on the mortgage payments.
- Many homeowners’ monthly mortgage payment includes an additional “escrow” portion for property taxes. So you may well be behind on property taxes because you’ve also fallen behind on the mortgage payments.
- That “escrow” extra monthly payment often also includes money for your homeowner’s insurance. Falling behind on that REALLY scares your lender because it could lose its collateral overnight in a fire or other disaster. Your lender would then pay out of its own pocket for its own version of insurance—usually much more expensive than what you were paying—and tack that insurance premium onto your bill. That puts you even further behind on your mortgage.
- Finally, even if you are current on your insurance and your mortgage payments because you pay those separately and have managed to keep up on those, your lender considers you falling behind on property taxes as a strong sign that you are not financially responsible.
Chapter 13 “Adjustment of Debts” Buys More Time, Protects Your Home
A Chapter 13 “adjustment of debts” bankruptcy solves both your property tax problem and your mortgage lender one.
You will very likely be given as much as 5 years to catch-up on your property taxes. This reduces how much you have to pay monthly, making it more feasible. Throughout that time the tax creditor would not be able to foreclose or take any other collection activity.
Under Chapter 13, even though you’d have as long as 5 years, there’s a good chance you’d actually be able to pay your back property taxes more quickly than after a Chapter 7 case. That’s because your Chapter 13 plan can usually delay paying other important creditors, such as the IRS or a spousal support enforcement agency, while you first catch up on the property taxes. Besides saving you on interest, that will make your mortgage lender less anxious.
As for solving your mortgage lender problem, Chapter 13 forces your lender to not take any action against you as long as you catch up on the property taxes as your court-approved plan allows you to do.
And if you are also behind on your mortgage payments, Chapter 13 is a particularly good option. You are usually allowed to stretch out your mortgage catch-up payments for up to 5 years as well. If you have a second or third mortgage, you may be able to “strip” it from your home’s title, saving you money each month and long term. Other liens—for income taxes, for example—can often be dealt with favorably. And throughout the life of the Chapter 13 case, as long as you are meeting the terms of your payment plan, you and your home will be protected from foreclosure or any other collection efforts by your mortgage company.