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Chapter 13 and tax deed sales

Florida is one of many states that allow homes to be sold in order to collect back property taxes. There are strict notice and other requirements, and sometimes the former owners are able to successfully challenge the sale or obtain other benefits in that regard. Another such state is Pennsylvania, and in 2016, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania was confronted with a relatively unusual issue.

In the case, a property owner’s home was sold to a private purchaser at a tax sale conducted by the city of Philadelphia after she was four years in arrears on her property taxes. The purchaser took care of the deficiency. Pennsylvania law allows a seller in such a situation to redeem the property within nine months after the deed is recorded, and the seller in this case filed a Chapter 13 petition within the statutory period. She proposed that the redemption amount be treated as a secured claim under the required 36-month repayment plan.

Both the city and purchaser objected to the proposal. The latter claimed that he held absolute title to the property, and he also claimed that the state law required payment in full within the statutory period. The court ruled in favor of the debtor, in part relying on the difference between the rights of mortgage lenders after a foreclosure and the more limited rights of tax sale purchasers.

This may have been a relatively unusual case, but Chapter 13 repayment plans often contain provisions that result in benefits to homeowners. In some cases, the process can have the effect of reducing some second mortgages to unsecured obligations, relieving a homeowner of the worries associated with possible foreclosure actions. An lawyer can often describe other advantages of this form of consumer bankruptcy.

Source: The Florida Bar Journal, “Florida Tax Deed Sales Are Getting Risky”, Robert M. Quinn, Feb. 10, 2012

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