Whether or not you can discharge your property taxes in bankruptcy depends on whether or not you want to keep your home.
First, it is important to note that bankruptcy is a Federal legal proceeding. It operates pursuant to a Federal statute called the U.S. Bankruptcy Code.
Where the Bankruptcy Code elaborates a rule, it overrides or “preempts” state law as to that point.
Where it does not, state law still applies to legal questions even though they may arise within the context of a Federal bankruptcy case.
This is also true where the Bankruptcy Code specifically refers to state law for the answer to a particular question.
One of these questions is how and at what cost property taxes must be repaid when owed to a Michigan municipality or county tax authority.
Property Tax Debt When Surrendering a Home in Bankruptcy
In Michigan, property taxes run with the land.
That colorful phrase means that property taxes owed are not personal (in personam) liabilities but liabilities attached to the property (in rem).
Thus, if you owe property taxes when a home is sold, foreclosed, or surrendered (and then later foreclosed) in Chapter 7 or Chapter 13 bankruptcy, the bank holding the mortgage or the subsequent purchaser of the property will be liable for payment of those property taxes.
They belong to the home, that is, and not to you.
When you walk away from the home, you walk away from the property taxes.
And, of course, failure to pay property taxes can lead to a tax foreclosure and thus necessitate your need to walk away from a home.
But what if you want to retain your home? Can bankruptcy help?
Treatment of Property Taxes in Chapter 13 Bankruptcy
First, it is worth noting that, if you are delinquent in your property tax payments or are facing an imminent tax foreclosure of your home, Chapter 7 bankruptcy will not help you to retain the property.
A Chapter 7 bankruptcy will enable you to discharge your personal liability for any mortgage or other debt related to the home’s ownership (other than criminal maintenance or other environmental citations, which are absolutely personal liabilities and which are not stayed or discharged by any form of bankruptcy).
Chapter 7 does not provide a homeowner, however, with any mechanism for curing a property tax delinquency.
Chapter 13 bankruptcy, on the other hand, will allow you to do just that.
A Chapter 13 bankruptcy is a reorganization bankruptcy. It is a type of bankruptcy in which you do not discharge debt flat-out as in a Chapter 7 but, instead, prioritize some forms of debt over others. Depending on the priority, you either pay them in full over as many as 5 years or, alternatively, partially repay them and then discharge the balances.
Unsecured debts such as credit cards or medical bills are paid last in priority in a Chapter 13 bankruptcy. They get what they get out of the monthly Chapter 13 plan payment that you send to the Chapter 13 Trustee assigned to your case (instead of directly to creditors). Anything owed to them at the end of the Chapter 13 process is discharged.
A home mortgage payment arrearage is paid higher in priority, repaid in even increments over 5 years, so that the homeowner exits the Chapter 13 process current with mortgage payments and out of danger of foreclosure.
How are Michigan property taxes treated?
Property taxes are paid likewise as a priority secured debt, like a mortgage debt.
The filing of a Chapter 13 bankruptcy case, first, triggers a Federal injunction known as the automatic stay against collections.
This stay injunction freezes any property tax foreclosure that is pending. (If the tax auction has already occurred, it is too late to save the property with the bankruptcy process.)
It is then possible to repay the delinquent property tax debt over as many 60 months without fear of foreclosure.
The question, however, is: how much do you needs to be repaid?
This is one of the questions which the Bankruptcy Code refers to state law.
If you are filing your Chapter 13 bankruptcy case in Michigan, it is Michigan’s state law that determines the interest-rate at which tax debt must be repaid—in or out of bankruptcy.
Property Tax Interest-Rates in Michigan
In Michigan, within the 1st year after a property tax debt becomes delinquent, it may be repaid at an interest rate of 1% per month.
Once property taxes are delinquent for a year, the property enters a “forfeited” status. At this point, the interest-rate owed increases to 1.5% per month.
Taxes owed for a forfeited property may still be repaid to the taxing authority for the county in which the property sits until the following March after the property is forfeited.
Once the property is fully foreclosed, titles transfers to the county, and the owner can no longer rescue the property with a Chapter 13 bankruptcy filing.
However, until that point, a Chapter 13 bankruptcy can be filed to allow the homeowner to not only bring property taxes current but relegate to low-priority payment status and discharge other unsecured debt that may be making property tax repayment difficult.
In any case, the Chapter 13 plan drafted and filed by the homeowner and his or her bankruptcy attorney must provide for full payment of the property taxes at the state statutory interest applicable to the property’s delinquency or forfeiture status on the date of filing of the Chapter 13.
That is, if you owe 2 years of property taxes at the time you file your Chapter 13, your plan must provide for the payment of the 1st year’s delinquent taxes at 1% per month and the remaining year’s tax debt at 1.5% percent per month.
The Current Extension of the Michigan Property Tax Interest Rate Reduction
In 2019, Governor Whitmer signed into law an extension of a 2014 law reducing property tax interest rates for homeowners in need. This interest rate reduction will not now sunset or expire until 2026.
Currently, homeowners whose properties have entered forfeiture status may apply for an Interest Reduced Stipulated Payment Agreement (or IRSPA), which reduces the 1.5% per month (or 18% per year) interest rate to 6% to allow homeowners to repay back property taxes over as many as 5 years.
If you are in an IRSPA with your county tax authority, what happens if you file a Chapter 13 bankruptcy case because you’ve also missed mortgage payments or because your credit card debt is still problematic?
The IRSPA should govern the interest-rate required to be paid in your Chapter 13 case as well.
However, you should expect the bankruptcy law firm customarily retained by the Treasury Departments of Wayne, Oakland, and Macomb Counties in particular to argue for the higher interest-rate.
Property Taxes in Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that, if you owe property taxes or are party to an IRSPA with your county tax authority, you need to retain an experienced bankruptcy attorney to assist you with your Chapter 13 bankruptcy filing.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.