Falling behind on home’s property taxes creates a special problem. The tax collector will likely be much less pushy than your mortgage lender.
Falling Behind on Property Taxes
If you have a mortgage on your home you can fall behind on your property taxes two ways.
First, most likely you’re paying your taxes as a portion of what you send monthly to your mortgage lender. When you don’t pay your monthly payment to your lender, you fall behind on both the mortgage and your taxes.
Second, if you’re paying your taxes directly to the county or other tax agency, you fall behind by not paying when it’s due.
The Consequences, Short Term and Long Term
Not paying your property tax results in losing your home through a property tax foreclosure. But in most parts of the country that doesn’t happen for a number of years past the due date. For quite a while you’ll likely just get occasional notices from the county/tax agency reminding you that you’re late.
It’s not the county/tax agency who’s likely to be making the most noise when you don’t pay your property taxes. It’s your mortgage lender.
Why Your Mortgage Lender Gets Upset
With virtually all mortgage contracts, falling behind on property taxes puts you in default on the mortgage itself. That means that even if you are current on the mortgage payments your lender could foreclose on your home just because you’re behind on the taxes.
The reason for this is that you owing back property taxes is quite dangerous for your lender. If the county/tax agency would foreclose on your home your lender (and other lienholders) would lose its legal rights to your home. That would leave the lender without any collateral at all on your mortgage loan. It risks getting paid nothing on the loan.
Even if a tax foreclosure would not happen for a few years, not paying property taxes is seen as an indication that you can’t afford the home. It’s a big warning sign for the lender
To prevent a tax foreclosure from happening your lender will almost certainly pay your past-due property taxes. The mortgage contract allows it to do so. As you can imagine it doesn’t like to put out money like this. So it then aggressively comes after you to pay it back, and quickly. If you don’t pay, your lender will likely start a home foreclosure. That’s especially true if you’ve also fallen behind on your mortgage payments.
If You Can Fix This Fast
If you can catch up quickly on the property taxes you may not need bankruptcy help. But presumably you fell behind because of some serious financial challenges.
Filing a Chapter 7 “straight bankruptcy” case can sometimes provide enough help. But that’s only if your bankruptcy filing improves your cash flow so much that you’d have enough extra money to catch up on the property taxes fast enough to satisfy your lender.
As you work with your bankruptcy lawyer on your budget, he or she will discuss this with you. It’ll likely be a key part of your conversation about whether to file a Chapter 7 or Chapter 13 case.
With Chapter 13 You Buy Lots of Time
If you can’t catch up fast enough to satisfy your mortgage lender, filing a Chapter 13 “adjustment of debts” case requires it to give you more time. In most cases you’d have between 3 and 5 years to catch up on the property taxes.
The first big benefit to you is that this long period of time reduces the monthly catch-up payment amount. Catching up becomes more affordable, making it more likely.
Another benefit is that you’re protected from your lender during this catch-up time. It can’t enforce its requirement that you be current on property taxes. As long as you keep your commitments under the Chapter 13 plan it won’t get permission to take any action against you or your home. The lender is protected because the county/tax agency is itself is prevented from taking any action. It can’t do a tax foreclosure, which benefits both you and your lender.
The third benefit of Chapter 13 is that it solves your property tax problem long term. You won’t fall behind again because your formal budget includes that expense. Plus you’re required to keep current as a condition of your payment plan. Your lender would likely be able to get permission to start a foreclosure if you don’t pay ongoing tax payments. But again, there should be room in your budget to keep current on these.
Then at the end of your Chapter 13 case you would be current on the property taxes. You’d have paid off the original unpaid tax and any accrued interest. Plus you’d have kept current on each new year of taxes because it’ll be in your realistic budget. Your property tax problem will be resolved.