If you are behind on property taxes on your home, Chapter 7 often doesn’t give you enough time to catch up. But Chapter 13 likely would.
Today we cover the 4th one of the 10 ways we listed recently that Chapter 13 helps you keep your home. When we gave the list we wrote:
4. Get Current on Past Due Property Taxes
Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the four months that a case lasts. However, Chapter 13 does protect you and your home while you gradually catch up on those taxes. You do so through a court-approved payment plan that also incorporates your mortgage(s) and all other debts.
Here’s an example to show how this works in practice.
Assume that you own a home worth $225,000, with a mortgage loan balance of $200,000. Your property taxes are $1,850 per year, paid directly to your county tax assessor instead of through your mortgage holder.
For years you paid the yearly property taxes out of a combination of income tax refunds and scraped together savings. And you took cash advances on credit cards whenever there wasn’t enough money.
Then a couple of years ago you lost your job and didn’t find a new one for several months. Plus the new one is at a lower salary. So last year when it was time to pay the property taxes you’d already maxed out on credit. You couldn’t pay the $1,850 in taxes. With the payments due every month on the credit cards, the mortgage, and other bills, you couldn’t pay the property taxes this year again. So now you’re behind $3,700 plus interest.
Your mortgage lender has been after you for not paying the property taxes. You’ve managed to stay current on the mortgage, but occasionally did so paying it also through credit cards when you still had some credit available on them. The mortgage lender is now threatening to pay the property taxes and foreclose on the house because of your failure to keep current on the taxes. You’re now justifiably afraid that you’re going to lose your home.
Chapter 7 Won’t Likely Cure the Dilemma
Filing a Chapter 7 “straight bankruptcy” might help but, because of how property taxes work, possibly not help enough.
That’s because most mortgage lenders consider nonpayment of property taxes a breach of your contract with them. And that’s because the property tax creditor usually has a legal right to foreclose the property out from under them! So your lender will itself likely pay your property taxes at some point to avoid that from happening. The mortgage contract almost always allows them to do this.
Then your mortgage lender will put pressure on you to pay off the money it fronted for the taxes. It will most likely threaten to foreclose on your home to make you pay. And it will most likely follow through on that threat if you don’t pay up.
When Chapter 7 Might Help
Filing a Chapter 7 case CAN sometimes solve this problem. But only if that bankruptcy filing improves your cash flow enough so that you would have sufficient extra money to catch up on the property taxes quickly enough.
How fast? Fast enough to keep your mortgage lender happy.
The problem is not usually with the county or whatever tax authority you owe directly on the property taxes. In most places a tax foreclosure by the county or other tax authority doesn’t happen until you are behind on property taxes a number of years.
Rather the urgency is with your mortgage lender. It would prefer not to put up the money for the property taxes instead of having you do it. And then once your lender does pay the taxes, it wants you to bring the account current quickly.
Going back to our example, if you’re behind two years of taxes, amounting to $3,700 plus ongoing interest, you and your bankruptcy lawyer would have to see how much you could afford to pay towards that after your Chapter 7 case has “discharged” (legally written off) all or most of the rest of your debts. If you can keep the property tax authority and your lender happy by catching up fast enough, Chapter 7 will have solved your problem. Your lawyer will be able to make the required calculations to advise you about this in advance of deciding which way to go.
The Additional Help of Chapter 13 “Adjustment of Debts”
If you CAN’T satisfy your mortgage lender fast enough, Chapter 13 would force your lender to let you have more time. In most cases you’d have between 3 and 5 years to catch up on the property taxes.
Stretching out the catch-up period that long reduces how much you have to pay monthly towards the property taxes. That makes catching up easier. Especially if you are far behind, it could turn an otherwise impossible situation into a workable one. Catching up the $3,700 property tax arrearage over the course of a few months could very well be impossible for you. Stretching that out over 3 or 4 or 5 years (monthly payments of about $75-$100) should be much more feasible.