Property Tax Debt–Another Reason to Get Bankruptcy Advice Before Selling Your Home

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.

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. 

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More Good Reasons to Get Bankruptcy Advice Before Selling Your Home

If under financial pressure to sell your home, bankruptcy law can surprise you with ways to keep your home or sell it on your own schedule.

 

When it comes to selling your home, it is only sensible to know all your available options before you act.

This is the third in a series of four blogs about why you should get advice from a bankruptcy attorney before rushing to sell your home. It is so easy to make false assumptions about your options, and feel like you have to act in a certain way because of those assumptions. This often happens when you are under financial pressure, you think you need to act quickly, and the last thing on your mind is to question your assumptions. Well, maybe there ARE some better options. Consider the following two situations:

1.  If You Need to Sell to Avoid a Foreclosure:

You likely know that filing a bankruptcy case stops a foreclosure. But that’s just the beginning. Bankruptcy law provides a wealth of tools for helping you keep your home, or to buy extra months or even years before needing to sell. If you have a second mortgage, you may be able to avoid paying most of it, potentially saving you tens or even hundreds of thousands of dollars. If you have a judgment lien, or tax or support lien, if you are behind on property taxes, or many months behind on your mortgage payment, in all these situations bankruptcy may be able to help in ways better than you thought possible. You may even be able to take advantage of property values that are finally climbing in most markets, by staying in your home permanently or long enough for it to regain some of its value.

The reality is that every homeowner who is facing a foreclosure has a unique set of circumstances. You need and deserve an individual analysis. Bankruptcy can often give you many different combinations for solving your personal home challenges, so you need to find out what will best fit your own goals.

2. If You Need to Pay off Your Ex-Spouse:

Divorce is so often so traumatic. Even in relatively non-antagonistic ones, emotions can cloud your judgment and memory. Your legal obligations about your property and your debts can get fuzzy.

So you may understand that your divorce decree says you are required to sell the marital home to pay off your ex-spouse. But that obligation might be changed through bankruptcy law. Most obligations that you owe arising from a divorce are not written off by a bankruptcy. But some are. And even those that are not written off, bankruptcy can affect the timing of payment or favor you in other ways.

Practically speaking, even if during your divorce you got some advice about how a possible future bankruptcy filing would affect the terms of your divorce, you may not remember that advice, or not remember it accurately. You had other things crowding your mind. You may not have even gotten correct advice, or complete advice, about all your options.  Many—maybe even most—divorce attorneys do not know bankruptcy law well enough to give you the complete picture. Plus circumstances could have changed in the meantime. So now, before you sell your home to pay off your ex-spouse, get current and thorough advice about your options from a competent bankruptcy attorney.

 

Please come back next week for the final blog in this series. Thank you for visiting. 

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Three More Good Reasons to Get Bankruptcy Advice Before Selling Your Home

Get advice if 1) you can’t afford your house payments, 2) it has an income tax lien, or 3) your mortgage modification was rejected.

 

The last blog gave three reasons why you should get advice from a bankruptcy attorney before selling your home. Here are three more. They will help you make better decisions about your home, and could save you lots of money.  

1.  If you think you can’t afford the house payments:   

You may really need to sell your home if it’s more house than you need, or its cost is way beyond your present financial abilities.

But, if you would greatly prefer to keep your home, and wish there was a way to do so, you may be able to. You may be able to reduce your home’s monthly cost, and do so even if you are under threat of foreclosure. Or you may be able to afford your present monthly cost, or a reduced cost, if no longer had to pay all or most of your other debts.

Last week’s blog gave you some ways to reduce the debts on the house itself (second mortgage lien “stripping” and judgment lien “voidance”), and next week’s will give some more.

As for reducing or getting rid of the rest of your debt, even if you don’t like the idea of filing bankruptcy you should find out your options. Especially with home prices starting to rise now in most parts of the country, now could well be the best time to use some of the extraordinary tools of bankruptcy. For example, if your home is “underwater” (you owe more than it’s worth), with a second mortgage “stripping” you can take advantage of the last half-decade’s loss of equity in your home, which likely you would not be able to do in a year or two if values continue to rise.

2.  If you have income tax debt:   

If you owe back income taxes, these taxes may have already attached to your home’s title through the recording of a tax lien. Or that may happen soon. With that tax lien or fear of one arriving, you would understandably feel some pressure—especially when combined with financial pressures on the home from other sources—to sell your home to pay those taxes.

But bankruptcy can often help you deal with your tax debts, often in surprisingly beneficial ways. Some income taxes—usually if they are old enough—can be forever “discharged” (legally written off) altogether. And those that can’t be discharged would likely be able to be paid much less than they would outside bankruptcy, through huge savings in interest and penalties, and other possible advantages. Tax liens in particular can be handled much better within bankruptcy. And most importantly, you and your home can be protected throughout the time the taxes are taken care of, taking away much of the pressure for you to sell your home.

So if income tax debts or tax liens are part of why you feel you must sell your home, first find out how bankruptcy would handle them.

3.  If your mortgage modification application was rejected:   

Although arguably the processing of mortgage modifications has improved over the last couple of years, they often continue to be a terribly frustrating procedure to go through. There are definitely times when mortgage modification requests are rejected because the homeowner failed to fully complete the application or the mortgage lender did not process it accurately. It may not even be clear why the modification was not approved. After going through this challenging process without a reduction in your mortgage payments, understandably you may well feel like you have no choice but to sell your home because you can’t afford it.

However, sometimes a bankruptcy filing—either Chapter 7 or 13, depending on the circumstances—can help get a mortgage modification approved. Reducing your debts through bankruptcy provides you more resources to put into your house, generally making you a better candidate for mortgage modification.

Conclusion

Deciding whether to sell your home of course involves many factors—personal, financial, and legal. Based on these last two blogs you can see that there are tools to help you keep your home—either for a limited period of time or permanently—that you likely were not aware of earlier. And these are just a few tools (with a few more next week), and they are just being discussed in general terms. Consider how much sense it would make to have your own unique situation be carefully reviewed by a competent attorney, resulting in a game plan designed to meet your personal needs and goals. You may be pleasantly surprised by the options and advantages that would apply to you. Let us help you make an informed and wise choice about your home. 

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Get Bankruptcy Advice BEFORE Selling Your Home

If you’re hurting financially, getting advice from a bankruptcy attorney before you sell your home could save you lots of money. 

 

Here’s how:

1.  Get rid of judgment liens, instead of pay them.

If you have been sued by a creditor, or by anybody, and you didn’t resolve and pay the obligation, most likely a judgment was entered against you.. You might not even realize or remember if this has happened to you. It may have been many years ago, potentially even before you bought your home.

Even if you did deal with it at the time and settle the matter, and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.

Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, because of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.

Even if you haven’t been sued by a creditor, if you are behind on payments a creditor may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title before the closing of your intended home sale.

In all these situations, the judgment lien generally has to be paid in full before the house sale can close. If, as usual, the judgment is paid out of the proceeds of the sale, this reduces the amount you receive. Or the lien could reduce the amount of money available to go to more important debts, such as taxes, child or spousal support.

If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance. Finally, if you don’t have enough to pay off the judgment creditor and it won’t settle under reasonable terms, that could kill your sale.

In contrast, either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.

2.  “Strip” a second mortgage.

Chapter 13 (but not Chapter 7) can often allow you to “strip” your second (or third) mortgage from the title of your home, resulting in you paying little or even nothing on that mortgage. This can save you tens of thousands of dollars, or even hundreds of thousands of dollars, especially when considering the interest savings over the length of time that you would own your home.

Chapter 13 is able to do this by changing the debt secured by the mortgage to an unsecured one, and then lumping that debt in with all your other unsecured creditors, and paying them only as much as you are able to over a 3-to-5-year period. This only works if your home is worth no more than the balance on the FIRST mortgage (plus the balance on any property taxes or other “senior” liens). In this situation, the law effectively acknowledges that all of your home’s value is eaten up by liens that are legally superior to the second mortgage, leaving no equity at all for that second mortgage, making it an unsecured debt.

At the end of your Chapter 13 case, having paid what your budget says you can afford to all of your unsecured debts, including the debt formerly secured by the second mortgage, the remaining balances on all of your unsecured debts, including the second mortgage one, would be permanently written off. You end up with your home completely free and clear of that mortgage, and much less underwater.

3.  Buy time for better offers.

Filing bankruptcy can buy more time for you to sell your house. It can buy a little extra time or even potentially a couple more years to sell.

A home sold under time pressure will almost never get you a good price. You will much more likely receive the maximum sale price after buyers have had plenty of time to view the property and make offers.

If you feel under immediate time pressure to sell because of a threatened or pending foreclosure, or because of other creditor problems, Chapter 7 can usually buy at least an extra few weeks, often an extra few months, and sometimes even longer, depending on the aggressiveness of your mortgage holder.

A Chapter 13 case could buy you many months or even a few years, depending on the circumstances. This may be very important for family and personal reasons. Also, considering that in many real estate markets the property values are steadily increasing, the additional time may even allow you to regain some of the property value lost in the “Great Recession.”

These advantages in selling your home—advantages in money and timing—are only possible if you meet with a competent debtor-creditor attorney and formulate an appropriate strategy, BEFORE you decide to sell the home.

The next blog will give you more ways that bankruptcy can give you huge advantages with your home. These can completely change whether or not you should sell your home, if you sell when you should sell, and who would get paid from the sale proceeds.

 

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