Catching up on Property Taxes When You Have a Mortgage
If behind on property taxes on property with a mortgage, that likely puts you in default on the mortgage itself. Chapter 13 can fix this.
The Problem
Let’s say you’re current on your mortgage, though barely hanging in there. But the bad news is that you’ve fallen behind on property taxes. With just about all mortgage contracts, simply being behind on property taxes puts you in default on the mortgage itself.
That’s because for you to fall behind on property taxes is very dangerous for the lender. The property tax creditor usually has a legal right to foreclose the property out from under your mortgage lender! That would leave the lender without any collateral at all.
So your lender will itself likely pay your property taxes to avoid that from happening. The mortgage contract allows them to do this. Then if you don’t pay back those taxes to the lender it can foreclose, even if you are otherwise current.
When Chapter 7 “Straight Bankruptcy” Solves This Problem
Filing a Chapter 7 case can sometimes provide enough help. But that’s only if your bankruptcy filing improves your cash flow enough so that you would have enough extra money to catch up on the property taxes quickly enough.
How much time would you get to bring the property tax current? That depends on your mortgage lender. Ask your bankruptcy lawyer about this at your first meeting with him or her. This is part of deciding whether to file a Chapter 7 case, or instead the more powerful Chapter 13 one.
Again, the urgency is not usually with the county or whatever tax authority you owe directly on the property taxes. (That is, unless you have not paid the taxes for a few years.) In most places a tax foreclosure by the tax authority doesn’t happen until you have been behind on property taxes quite a while.
Instead the urgency is with your mortgage lender. It would rather not pay the money to cover the property taxes instead of having you do it. And then once your lender does pay the taxes, it wants you to pay it back fast. If you can’t catch up on the back taxes fast enough, you could lose your home to a foreclosure by the mortgage holder way before the tax authority would have foreclosed directly.
With Chapter 13 You Buy Lots of Time
If you can’t satisfy your mortgage lender fast enough, Chapter 13 forces 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 direct and obvious benefit is that such a long period of time reduces the monthly catch-up payment amount. Catching up becomes more feasible, which makes keeping your home more likely.
The next benefit is the one we’ve been focusing on. The mortgage lender is stopped from enforcing its contractual condition that you be current on property taxes. It can’t foreclose on that basis, as long as you keep fulfilling your commitments under the Chapter 13 plan.
Similarly the tax authority itself is stopped from foreclosing, or from taking virtually any other kind of collection action.
With Chapter 13 You Likely Won’t Fall Behind on Property Taxes Again
A final benefit is that Chapter 13 helps prevent you from falling behind on property taxes going forward. This is extremely important for practical reasons. It doesn’t do much good to get as much as 5 years to catch up on property taxes if you’re going to start falling behind again during that period of time.
You won’t fall behind again because the budget you and your bankruptcy lawyer put together includes that expense. And if your circumstances change during the case, there is often room to change the budget and the plan payment. So there should be room in your real month-to-month finances to keep current on future property taxes.
At the End of the Case
At the end of your Chapter 13 case you will be current on the property taxes, having paid off the original unpaid tax and any accrued interest, and having kept current on each year of new taxes during your case. Your tax authority will be happy, your mortgage lender will be happy, and you’ll be happy.
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