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Chapter 13 bankruptcy is the form of bankruptcy most useful to Metro Detroit residents facing tax foreclosure.
Even if you own your home free and clear of mortgage encumbrances, it is still possible to lose your home through tax foreclosure.
Michigan law provides that, if you do not pay your property taxes, your home will be forfeited and then foreclosed. Once the home is foreclosed, it is auctioned off in a tax sale by the county in which the property rests.
Chapter 13 bankruptcy is the form of bankruptcy most useful to Metro Detroit residents facing tax foreclosure. However, as with everything in life, timing is everything.
When can a home be saved from tax foreclosure with Chapter 13? When is too late?
This Article will answer these questions as well as explaining some basics about both Chapter 13 bankruptcy and the Michigan tax forfeiture and foreclosure process.
What Is Tax Foreclosure?
Property tax foreclosure is the process by which local communities in Michigan ensure that they remain solvent. That is, property taxation is the process by which your city and county ensure that they have the funds on hand necessary to pay for the governmental services you need. Property taxes pay for building inspectors, fire fighters, police officers, road repair and construction, and any number of additional governmental benefits.
Some cities in Michigan, such as Detroit and Pontiac, do impose an income tax upon residents and those working within city limits. However, the vast majority of cities and counties in Michigan do not. Governmental and city services are exclusively paid with the monies earned from property taxes (as well as other fees, such as licensing fees).
Property taxes are billed based upon your home’s State Equalized Tax Value, or “SEV.” The higher your property’s fair market value, the higher your SEV will be. You can view your SEV on the property tax statements issued by your city or township twice per year.
Is it fair for governments to pay for the repair of a road you rarely use with taxes levied from your based your home’s value?
This specious Libertarian question is outside the scope of this Article. It is Michigan’s system, plain and simple. Further, it is the system utilized in nearly everywhere else in the United States as well, if not everywhere in the country.
If your property taxes are not paid through an escrow account maintained by your mortgage servicer, it is your obligation to pay the property tax bills sent to you directly by your city or township.
If you do not make these payments or make them insufficient amount, your home is in danger of property tax foreclosure.
That is, it will be seized and auctioned off by your county.
Wayne County Tax Foreclosure Timeline
Don’t worry: property tax foreclosure does not happen overnight. It is roughly a 3-year process, governed by Michigan state law.
So long as you don’t bury your head in the sand, this allows you plenty of time to retain a Michigan bankruptcy attorney to file a Chapter 13 bankruptcy for you. A Chapter 13 bankruptcy filing will indeed stop the property tax foreclosure process.
We’ll discuss Chapter 13, below.
First, for a helpful review of the actual property tax foreclosure timeline, we will use Wayne County’s published tax foreclosure timeline as an example.
This timeline, briefly, is as follows:
- March of any given year: Unpaid property taxes from the prior year(s) become delinquent. The bills are forwarded to the Wayne or other County Treasurer for collection, including interest and fees.
- October of that same year: Collection fees are added.
- The following March: The property is forfeited to the County Treasurer. Further fees and increased interest-rates apply.
- The following October: Service of Show Cause Foreclosure Hearing notices.
- Hearings held the next January.
- The next March (the 3rd from the date of original tax billing), a judgment of foreclosure is entered by the Circuit Court.
- 30 days later, in April, the property is fully foreclosed, and the homeowners loses all rights. Title passes to the county.
- The property is then auctioned to the public in September or October, following foreclosure.
Remember this timeline as we continue, below.
Forfeiture vs. Foreclosure
But, first, what is the difference between forfeiture and foreclosure under Michigan law?
Forfeiture is a state of “pre-foreclosure.” Is it the point at which the property taxes become owed to the county rather than to your city or township. The interest rate accruing against the delinquent property tax debt increases from 1% per month to 1.5% per month once it is forfeited.
Once your property is forfeited, you have 1 year before it is foreclosed in which to bring the property tax bill current.
Foreclosure is the next and final step in the disposition of your property. Once foreclosure occurs, as noted above, you lose all rights to the property.
The final redemption right for the foreclosed property expires the March 31st prior to the entry of a judgment of foreclosure—or within 21 days of the entry of that judgment if you contested the foreclosure case.
What Is Chapter 13 Bankruptcy?
That all sounds intimidating, doesn’t it? Well, the good news is that, if you qualify and can fund a Chapter 13 bankruptcy payment plan, you can stop a tax foreclosure and save your home.
But what is Chapter 13? How is different from Chapter 7 bankruptcy?
A Chapter 7 bankruptcy cannot save your home. It simply discharges your debt. If your home is being foreclosed (for any reason), a Chapter 7 is an excellent way to discharge any personal liability you may have as regards your mortgage liability. It is also a good way to surrender the real estate in question if you just don’t want to deal with it any longer.
A Chapter 13 bankruptcy, on the other hand, allows you many more options for preserving and saving real estate in tax foreclosure.
The Chapter 13 is a reorganization bankruptcy process. It allows you to “re-organize” the order in which you repay your various creditors. It is a Federal legal process that preempts, or overrides, nearly any state law-based collections process, including city and county tax foreclosure.
In a Chapter 13 bankruptcy proceeding, you file with the US Bankruptcy Court in downtown Detroit, Flint, or Bay City a 3-5-year Chapter 13 payment plan. This Chapter 13 plan commits you to repaying all of the debt that you owe by way of a single monthly payment made to the Chapter 13 Trustee assigned to your case. The Chapter 13 Trustee takes that monthly payment and distributes it to your creditors in the priority payment order described in your Chapter 13 plan.
The priority order for the payment of Chapter 13 creditors is established in the US Bankruptcy Code. This is the Federal statute governing the bankruptcy process in the United States.
This priority creditor payment order is determined by the type of debt owed to any given creditor. Secured creditors and the arrearages owed to secured creditors are paid first. Property taxes and other tax debts are paid next. Credit cards, medical bills, back rent, and other “unsecured” debts are paid last.
Unsecured creditors only receive whatever is left over after all higher priority creditors are paid.
Prior to forfeiture, property tax debts are treated as “priority” unsecured debts—paid in between secured debts and non-priority unsecured debts (such as credit cards).
After forfeiture, property tax debts are generally considered higher priority secured debts in this priority scheme.
The 1% or 1.5% interest rate provided under Michigan state law will also need to be paid through a Chapter 13 bankruptcy, depending on whether the property is in forfeiture or in foreclosure (prior to expiration of the redemption period).
How Can Chapter 13 Bankruptcy Stop Tax Foreclosure?
The first advantage of a Chapter 13 bankruptcy is the activation of a Federal injunction stopping all collections proceedings upon filing. This injunction is known as the “Automatic Stay Against Collections,” and it applies to property tax foreclosure proceedings.
Once you file for Chapter 13 bankruptcy, your city, township, or county must immediately cease any ongoing foreclosure proceeding. It must also cease and desist from mailing you collections notices or engaging in any other collections activity for the duration of the Chapter 13 case.
Again, remember that the Chapter 13 process may be 5 years long. This is, in short, a powerful tool at your disposal.
Once the property tax foreclosure is halted, the full property tax debt can be repaid through the Chapter 13 plan—in priority over any unsecured debts that have sandbagged your ability to pay.
Interest must be included, as well as any fees that have been incurred prior to case-filing. But, if you can successfully complete your payment scheme, you will exit the Chapter 13 with your property taxes current.
Foreclosure will not be an issue going forward. And, for that matter, neither will the unsecured and other debts that perhaps hampered your property tax payments prior the Chapter 13 filing.
They will have been discharged in full, with very few exceptions.
Chapter 13 Bankruptcy Limitations
There are some limitations to the ability of Chapter 13 bankruptcy to help you with a property tax foreclosure, however.
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Income Requirements
You may have divined this limitation from the description of the Chapter 13 process above. That is, the process requires that you make a monthly payment to your Chapter 13 Trustee. In order to make such a payment, you must, of course, have regular and predictable income.
The Chapter 13 plan payment amount is premised upon your “net” (take-home) household income, after necessary monthly expenses are deducted.
If you don’t have anything left, you have no money with which to make a Chapter 13 plan payment. Of course, you must factor out your debt payments, as this will be paid (or discharged) through the Chapter 13. But if your basic necessaries eat up all that you earn, or if you earn very little or nothing at all, Chapter 13 may not be a viable option for you.
There are other eligibility criteria for Chapter 13, but your Chapter 13 bankruptcy attorney will discuss these questions with you in your initial consultation.
The relevant question is whether you make enough money not only to make a Chapter 13 plan payment at all but whether the size of your payment will be sufficient to pay your entire property tax (and other priority and secured debts), including interest. $200/month, for example, is generally sufficient only to pay the fees of your Chapter 13 Trustee and your own bankruptcy lawyer.
You have to be able to pay enough to fund your particular plan.
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Timing of the Chapter 13 Case Filing
The other primary consideration is whether you are too late to save your home at all. Again, as you may have divined from what you’ve read so far, there is a point at which you cannot save your home with a Chapter 13 bankruptcy.
This would be after the home is fully foreclosed and your right of redemption has expired. As of that point, you no longer have any legal interest in the home. Thus, at that point, you no longer have legal standing to save the home.
It is imperative, therefore, that if you are heading into property tax foreclosure and cannot pay the tax debt on your own, you contact a Michigan bankruptcy attorney immediately to explore your Chapter 13 options.
Saving Your Home from Tax Foreclosure with Chapter 13: The Bottom Line
The bottom line is that Chapter 13 bankruptcy is a highly complex legal proceeding that requires an attorney with specific expertise to manage successfully.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
If you are facing property tax foreclosure or any other debt difficulty, contact us now to schedule your free initial consultation.
