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3 Ways to Stop a Property Tax Foreclosure
Ryan G. WrightJul 4, 2021 10:46:07 PM6 min read

3 Ways to Stop a Property Tax Foreclosure

Foreclosures are terrifying no matter their reason. Knowing that you’re about to lose your home and all the equity (both money and sweat) put into it can make even the most stoic of us feel knots in our stomachs. Many homeowners and real estate investors seem to overlook the seriousness of staying up-to-date with their property taxes. Even if you own your home outright with no mortgage, there is still the potential for foreclosure due to unpaid property taxes. It can happen and has caught many homeowners by surprise. Would you know how to stop a property tax foreclosure on your home?

The easiest way to stop a tax foreclosure is to contact your local tax office and get your account back into good standing. This may involve creating a payment plan or might require paying off your tax obligation in full. If this isn’t an option, consider selling the home or filing for bankruptcy. Bankruptcy, however, is a short-term solution and may create more problems than solutions due to the extra costs associated with the process.

Let’s first break down what property taxes do, what a tax lien foreclosure might look like, and a deeper dive into your options to prevent foreclosure and eviction.

A Quick Guide to Property Taxes

Property taxes vary from state to state in the US, so it’s difficult to give any specific advice. Be sure to consult an attorney so that you have a complete understanding of your tax obligations on any real estate investment deal.

Assuming you’re in a state that requires property taxes, these are yearly taxes paid to the local municipality. Often they’ll be separate from other taxes like income or school, and many lenders will fold them into your mortgage so that you’re only on the hook for one payment that covers both. 

Property taxes can fluctuate based on market conditions, as the more valuable an area becomes, the higher the taxes will go. Your taxes will go towards the maintenance of your town and are usually allocated to things like roads, public works, snow removal, fire and police, and sometimes trash removal.

Since they’re so critical to the community’s common good, not paying your property tax can come with severe consequences. While you might own the home, your municipality still has the right to foreclose on you if taxes go unpaid.

What’s important to be aware of when it comes to property taxes is that they’re considered superior over every other debt or obligation on the property. This includes your mortgage which is why your lender is usually willing to incorporate them into your mortgage.

Consequently, if a property has a tax lien on it, that lien must be paid before anyone else can get their money. Not even banks are immune to this, their assets are also able to be foreclosed on if property taxes are unpaid.

The Timeline of a Tax Foreclosure on a Property

Property tax foreclosures work similarly to bank foreclosures in that there’s a process that must be undertaken before the town can take full ownership of the home. 

Once the homeowner is considered in default on their property taxes, the town will issue what’s known as a tax lien on the home. Once the lien is issued, there is typically a period of time where the homeowner has the opportunity to make things right and maintain ownership. You’ll most likely receive a notice in the mail saying your taxes are past due. Don’t ignore this letter; this could be your best chance to work out a deal. Sometimes the deal will involve a payment plan with strict guidelines where a single missed payment revokes the payment plan completely. Other times the town will require payment in full within a certain amount of time.

Who Gets Ownership of the Foreclosed Property?

If the homeowner cannot get the property taxes back in good standing, the town can issue either a tax lien certificate or a tax deed. These can then be sold off to real estate investors at public auction.

With a tax lien certificate or a tax deed, the investor pays off the outstanding taxes in exchange for the potential to buy the home directly from the town. The homeowner who is in default then pays the investor the amount owed plus interest. If they’re able to pay off their obligation within a certain period of time, they may be able to keep their home. Quite often, though, the debt will be too great, and the investor will take over the title. 

It’s important to note that even if you have a mortgage, the bank will not own the property when it’s foreclosed on due to taxes. They won’t be able to recoup their costs, so you may still be on the hook for your mortgage in addition to the tax lien.

Three Ways to Stop A Property Tax Foreclosure

We all fall on bad times, so I know that anyone can find themselves in a situation where they’re not sure what to do. While there aren’t many options when it comes to getting around your tax obligation, there are a few ways you can stop the foreclosure from happening.

  1. Pay the taxes off – I know this is sometimes easier said than done, but it’s important to face your obligations head-on as a homeowner or property investor. Don’t run from having a hard conversation with your local tax clerk.  They’re going to want their money, but they also have a vested interest in making sure their neighborhoods aren’t full of abandoned homes. Talk with them to see what options are available to get you back into good standing.
  2. Sell the property – If you can sell it off before the foreclosure, there’s a chance that you’ll be able to see some money back. Again, your tax obligation will get paid off first, then any other positions on the title, and anything that’s left goes to you. While that might equate to way less than what you expected when you first thought about selling your home one day, it’s better than having a foreclosure on your credit report.
  3. File for bankruptcy – This is only a temporary solution, like a stay of execution. You’ll still owe your taxes but may get some breathing room. I wouldn’t advise going straight to bankruptcy first, as you might find yourself off worse than before due to lawyer fees and other bankruptcy costs.

Final Thoughts

Worrying about losing your home or investment property due to unpaid property taxes isn’t something I’d wish on anyone to have to deal with. It’s a stressful, gut-wrenching process that can wreak havoc on your life. If you’re facing a foreclosure due to unpaid taxes, it’s best to get ahead of it as much as possible. Talk to your local tax office and see what options are available before going any further. Also, be sure to consult your attorney to see if bankruptcy is a viable option for your situation. If you’re reading this because you’re in this situation, I genuinely wish you the best of luck. 

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