Previously, I had written a blog exploring what at that time was an unsettled area of the law. That blog explored whether you could utilize a preference avoidance action pursuant to 11 U.S.C. § 547 to retain your home after a foreclosure. Recently, the Third Circuit has rendered a binding decision in In re Hackler on a similar issue establishing that you can keep your property even if a property tax foreclosure has been completed prior to your bankruptcy filing. This blog will explore the property tax foreclosure process and what steps you can take to retain your property if you are facing a tax foreclosure or if the tax foreclosure has even been completed.
What are Property Tax Sales?
If you own real property, then you must pay property taxes to keep your property. Property taxes are an in-rem liability meaning that they only attach to real property. Therefore, a monetary judgment cannot be entered against you for failure to pay property taxes. Generally, if you have a mortgage on your real property, then the ongoing property tax payments are incorporated into your monthly mortgage payment. If your property tax payments are not incorporated into your mortgage payment, then the mortgage company will often pay the property taxes if they have not been paid. The incentive for the mortgage companies to pay unpaid property taxes is that property tax liens get priority to mortgage liens. Therefore, the mortgage companies act to protect their lien position by paying the unpaid property taxes.
After property taxes have not been paid, municipalities will conduct a tax sale for your property. The winner of the bidding for the tax sale will hold a tax sale certificate. Depending on the bidding and premium paid, the tax amount and subsequently advanced amounts can accumulate interest at 18% until the obligation is paid.
Property Tax Foreclosure
Upon the purchase of a tax sale certificate in New Jersey, the holder of a tax sale certificate must wait two years prior to filing a foreclosure complaint to seek to divest the property owner of ownership of their property. In the event no one purchases the tax lien at the tax sale, then the municipality will need to wait for six months to commence a foreclosure proceeding. In New Jersey, a tax foreclosure is a strict foreclosure meaning that judgment vests title directly to the holder of the tax lien. At the conclusion of a property tax certificate foreclosure action, an order will state a date of redemption to redeem the tax lien prior to ownership passing to the tax lien holder. If you are contemplating filing for bankruptcy, then you should file your bankruptcy case prior to the redemption date set forth in the court order to avoid ownership passing.
What is a Preference Action?
Section 547 of the Bankruptcy Code provides the statutory framework for preference actions by stating that
the trustee may avoid any transfer of an interest of the debtor in property— (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made— (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
Pursuant to 11 U.S.C. § 547(f), “the debtor is presumed to have been insolvent on and during the 90 days preceding the date of the filing of the petition.”
In re Hackler and the Use of the Preference Statute to Void a Tax Sale Foreclosure
In In re Hackler, a third party purchased a tax sale certificate on the Hackler’s real property. The tax sale certificate in this matter was not redeemed prior to title to the real property vesting in the tax sale certificate holder. Within ninety days after title vested in their real property, the Hacklers filed a chapter 13 bankruptcy proceeding. The value of the real property was listed at $335,000.00. The liens that were on the real property were listed at significantly less than the value of their real property. The Hackler’s commenced an adversary proceeding seeking to void the transfer of their property under 11 U.S.C. § 547 upon filing for bankruptcy.
In reaching its decision, the Third Circuit evaluated the elements of 11 U.S.C. § 547(b). The transfer to the tax sale certificate holder was for the benefit of a creditor, for a debt that arose prior to the bankruptcy case, while the Hackers were insolvent, within ninety days of the bankruptcy filing and allowed the tax sale certificate holder to receive more than it would in a chapter 7 liquidation considering that it received a $335,000 real property for a $45,000 debt. Accordingly, the Court found that the elements of 11 U.S.C. § 547 were met rendering the transfer voidable.
The tax sale certificate holder argued that lawful tax sale foreclosures cannot be voided pursuant to 11 U.S.C. § 547. The Third Circuit differentiated tax foreclosures from mortgage foreclosures in that they could not conclude that a tax foreclosure constituted reasonably equivalent value whereas a mortgage foreclosure is subject to public auction. The court’s reasoning behind this finding was that “the relationship between the winning bid and the value of the underlying property is not merely attenuated but nonexistent.
Are You in this Situation?
If you recently lost your real property to a tax foreclosure sale based on a debt significantly less than the value of the real property, then you need to act quickly. Once ninety days passes, the right to pursue a preference action to avoid the transfer will be lost forever. If you are considering filing for bankruptcy to avoid a tax foreclosure, it is important to contact an experienced New Jersey Bankruptcy attorney to guide you through your options and present you with the potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.