Losing one’s home to foreclosure is never easy. One of our readers, “Kate,” wants to know whether she will still be on the hook for her property tax bill if it gets to that point. She writes:
If one “walks away” from their home mortgage, home goes to foreclosure, but still owed a current property tax due on that home, does the bank pay the tax lien (bill) when the house sells again? Or can the local county come after the old owner ?
Whether or not you will be responsible for the property taxes owed depends in part on where you live. In Florida, for example, “The liability follows the property, not the owner,” says Jo Ann Koontz, an attorney and CPA with Koontz and Associates. When the lender forecloses, the “property tax is paid by the lender in the foreclosure sale. They can’t wait until the bank sells to the next buyer; it has to be paid at the auction,” she explains.
But in other states, that may not be the case, warns Eugene Melchionne, a Connecticut bankruptcy attorney. He elaborates:
Some states do not require an auction as part of a foreclosure. Connecticut and Vermont are examples of this. When the foreclosure completes, the bank may become the owner of the property, but there is no absolute requirement that the taxes which attach to the property be paid at that time. As a result, some municipalities are suffering from declines in tax collection as the lenders fail to pay the taxes timely.
While the personal liability for the future taxes is cut off with the completion of the foreclosure, personal liability for the past taxes remains unless there is a bankruptcy discharge. Therefore, some municipalities can issue a tax warrant for collection against former owners (because they are local and thus easily reached) to collect the old taxes while letting the current taxes accrue. Since the time to collect property taxes can be quite extended (15 years in Connecticut) unless there is an absolute need for cash, a municipality may elect to sit on the taxes for a while. In Connecticut, taxes bear interest at the rate of 18% annually so it can be considered quite the investment. You might call this ‘Zombie Tax Debt’ as opposed to debt coming from a Zombie Deed.
In addition, it’s important for homeowners to understand that when they walk away from their homes, lenders sometime leave those properties in limbo and fail to actually foreclose. During that time, the homeowner remains the owner of record and remains responsible for certain expenses. For example, “Homeowner association dues continue to be the liability of the property owner if the foreclosure doesn’t happen or is substantially delayed,” Koontz points out.
There’s more to consider. Even though the homeowner may not be living in the property anymore, it’s important to make sure that liability insurance is still in place in case of an accident on the property. And not to be alarmist, but in some jurisdictions of the country, the owner may be criminally liable for failing to maintain a home to code!
Other risks of walking away include the fact that the lender may be able to try to collect a deficiency for several years, depending on state law and whether the loan was a recourse or non-recourse loan. Plus, there could be a hefty tax bill for cancelled debt for those who don’t qualify for an exclusion such as the one offered under the Mortgage Forgiveness Debt Relief Act.
In other words, it’s not as simple as just saying, “Take the house, I don’t want it anymore.”
That’s why I always advise someone who is unable to keep up with their house payments to get professional advice from a real estate and/or bankruptcy attorney, and to talk with a tax professional as well. I know it may feel like throwing good money after bad, but failing to get expert advice could literally cost you tens of thousands of dollars down the road.
To learn more about “zombie deeds” and “zombie taxes,” listen to an interview with attorney Eugene Melchionne here.