Reducing Foreclosure Risks for Those Facing a Property Tax Lien

The home mortgage crisis has received a lot of attention over the last few years. This has led to various efforts to preserve homeownership, including the creation of foreclosure mitigation programs through federal legislation as well as other local and state efforts. However, another threat to homeownership that should also be given careful consideration today is foreclosure as a result of property tax lien.

The NCLS Report

A report by National Consumer Law Center (NCLS) highlights the risks that homeowners face in light of property tax collection and how local government could assist them. NCLS is a nonprofit organization that advocates for economic security for the disadvantaged and low-income members of the society and consumer justice. In preparing their report, NCLS reviewed the tax sale laws in all the states and identified some of the problems that increase the likelihood of foreclosures. Several recommendations were also made concerning what state policymakers could do to address these problems.

The Dilemma

Local governments face significant financial pressures that make it necessary for them to receive a steady stream of tax revenue. Property tax delinquencies amount to about 15 billion dollars every year, which is why property tax lien laws are solely designed to recover the tax amounts. On the other hand, many homeowners today face the negative effects of the recession including the difficult job market, a decline in home values and high rates of mortgage foreclosure. While property tax collection procedures should ensure that local governments recover the tax revenue that is needed to provide essential government services, it is also important for them to preserve home ownership.

Tax Sales

Every state has laws that permit the local government to sell property whenever the owner does not meet his or her property taxes or municipal charges through a process of tax lien foreclosure. The lien placed on the property is in the amount of the unpaid taxes. If the owner is unable to pay the taxes owed, the lien is auctioned to private purchases and investors; the buyer of the lien or tax sale gains an interest in the owner’s property. However, the property owner is given a ‘grace period’ during which he or she can redeem the property. The owner in such a case is required to pay the tax sale purchase price as well as interest earned, penalties and other costs. If the owner cannot redeem the property within this limited time period, a foreclosure is initiated and the owner loses the property altogether.

The Problem

In most states, the laws pertaining to property tax lien are outdated; they do not reflect the current economic conditions nor do they protect homeownership. For instance, the interest and penalties homeowners have to pay when redeeming their property after a tax sale produce profits for the tax sale purchasers at a rate that is much higher than that earned for ordinary investments. While banks provide interest on savings accounts at less than 1 percent, tax sale purchasers can recover interest at rates that are higher than 18 percent. These excessive penalties could easily make it impossible for homeowners to avoid foreclosures.

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In preparing their report, NCLS reviewed the tax sale laws in all the states and identified some of the problems that increase the likelihood of foreclosures. Several recommendations were also made concerning what state policymakers could do to address these problems.

Tax Relief Programs

In many states, homeowners have the option of avoiding tax liens by obtaining an abatement or reduction of the taxes they owe. However, many homeowners who stand to benefit from these programs are not even aware of their existence. If tax affordability is addressed before tax problems occur by ensuring that these programs are utilized effectively, local taxing authorities would be able to encourage the prompt payment of taxes without exposing homeowners to unnecessary tax sales.

Payment Plans for Tax Sales

Some local tax collectors actually allow property owners to enter into payment plans to avoid tax sales or repay the redemption amount. However, tax collectors in most states are not required by law to adopt explicit procedures to facilitate such payment plans. If local tax collection offices adopted such programs, homeowners would be in a better position to pay their taxes and save their homes. Municipalities would in turn avoid the indirect expenses incurred as a result of vacant homes or emergency services required by displaced families.

Adequate Information for Homeowners

The tax sale procedure is often complicated; property owners are generally unaware about the point at which they lose their legal interest as homeowners or what they can do to regain ownership. Although property owners are given an initial notice concerning an impending tax sale, there is a general lack of information concerning the post-sale procedures that ultimately lead to foreclosure. It is recommended that states provide property owners adequate notice at each stage of the procedure for the tax sale. Detailed information including details of tax exemptions, repayment plans and redemption rights should assist owners avoid tax sales.

Fair Redemption Costs

The cost for redeeming property provides incentives to potential investors to participate in tax sales by providing a reasonable return on their investment. However, tax sale purchasers often gain profits at very high interest rates simply because the laws are not adjusted appropriately to reflect the current economic conditions. State laws should ensure that the interest earned on redemption amounts is set at a fair price and adjusted periodically. In addition, states should ensure that additional costs such as attorney fees applied to redemption amounts are not exaggerated as this deters property redemption.

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Redemption Rights

Most states provide property owners the right of redemption after the tax sale to avoid foreclosure, but the redemption period is very brief in some states, with some lasting for a period of only 30 days. A one-year minimum redemption period is recommended for those states without a redemption period or those with a short redemption period (less than a year). In addition, redemption assistance programs that provide small emergency loans should be availed to those homeowners facing temporary financial difficulties.

Equity Protection

Tax sale laws only provide recovery of the taxes owed to the taxing authority; tax sale purchasers do not bid on the fair market value of the property. This puts homeowners at risk of losing their homes as well as their equity, which often amounts to their entire life savings. The initial tax sale should be limited to the sale of the tax lien certificate as opposed to the owner’s full interest in his or her property. In the case of a foreclosure, the sale price should reflect the fair market value of the property so the owner is reasonably compensated for the property and equity lost. Ultimately, tax sales should be more equitable even when used as a last resort.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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