Bankruptcy & Property Taxes

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Bankruptcy eases the filer’s debt burden, but in most cases it doesn’t offer much in the way of tax relief. This holds true whether you file for Chapter 7 or Chapter 13 bankruptcy. The former offers relief for most unsecured debt, but property tax rarely falls into that category. Chapter 13 will give you more time to pay the debt off, but it won’t eliminate the obligation.

Recent Tax Bills

In Chapter 7 bankruptcy -- the most common personal bankruptcy filing -- one goal is to eliminate as much debt as possible to regain your financial footing. However, property tax incurred in the year before you file for bankruptcy is nondischargeable. That debt can’t be included in the filing, and you’ll remain responsible for paying the bill. Older property tax debt may be dischargeable in Chapter 7 if it’s simply an old bill or bills you haven’t paid, but there's a catch.

Property Tax Liens

Older property taxes are generally secured with a lien. This attachment to the property assures that the tax bill will have to be paid before the property can be refinanced or sold. Property liens aren’t dischargeable in bankruptcy, so they will remain in effect until you pay them off or until you sell or surrender the property. Even if the debt itself would be considered nonpriority debt, that doesn’t eliminate the lien, which will remain until you settle the bill.

In Foreclosure

Bankruptcy doesn’t always result in the filer being able to keep his home. If your property was discharged in bankruptcy, your liability for current and future property taxes may cease as well, because the taxes run with the house rather than with the owner. The lender has incentive to keep the tax bill current once it assumes ownership of the property, because a lien would otherwise prevent sale of the property.

Chapter 13

Filing Chapter 13 bankruptcy won’t remove a property tax obligation either, but it may give you extra time to pay it. Your priority tax debts must be paid in full during the bankruptcy period, and this includes property taxes. However, you’ll have between three and five years to settle that debt. This keeps the obligation on your record for a longer time, and any lien placed on your home remains on your credit report until it's completely paid off.


Photo Credits

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