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Tax Foreclosures and Chapter 13 Bankruptcy

Posted on Jun 13, 2012 in Bankruptcy, Chapter 13, Foreclosure - Saving Your Home, Real Estate, Wisconsin

Suppose you own your home or a rental property and don’t pay the real estate taxes on time.  If they build up and you don’t pay for 2 years or more, you may be facing a “tax foreclosure”.

Tax foreclosure is different than a standard foreclosure in Illinois or Wisconsin, because a regular foreclosure goes through the court system.  The lender has to sue the homeowner and any other lienholders, get a judgment, allow for a redemption period, sell the property at auction, and decide whether to collect on any remaining balance.

In tax foreclosure, the property goes through an administrative process and gets turned over to the taxing party (say, the City of Milwaukee) after a notice period.  There is no auction, but rather a transfer for the amount of unpaid taxes.

Recently, courts in New York and Wisconsin have ruled that these transfers can be considered “fraudulent conveyances” in Chapter 13 Bankruptcy.  What does that mean?

What is means is that this is no different than a homeowner deeding his $100,000 house to his Aunt Sally for $3,000.  It is a transfer within 2 years of filing bankruptcy for less than fair value.  There is no exception for a transfer to a City or taxing party in the code.

The debtors in a few Chapter 13 cases (grouped together by the court for ruling on the law)  each sued the City of Milwaukee in their Chapter 13 bankruptcies.  They sought to get the house back and try to redeem the homes by paying the back taxes through their Chapter 13 Plans.  The City was furious, because they had followed the process set forth in the Wisconsin Statutes.  They believed that the debtors were looking to essentially make the law toothless.

The Court took this in to consideration but ruled that in the rare case of a bankruptcy filing in the 2 years after a tax foreclosure, the actions were in fact fraudulent conveyances.  The law didn’t say the City of Milwaukee must sell the homes at auction, but they surely couldn’t say with a straight face that a $100,000 home’s fair value was $8,000 due to that amount being owed in taxes.  They didn’t hold a public auction as lenders in foreclosure do.  That part of the process made the transfer fraudulent, because they couldn’t establish fair value.

If you have had a home lost to tax foreclosure in the last year or so and think you might be able to afford a Chapter 13 payment plan, contact us at Lakelaw.  We might be able to use this decision to your advantage and recover a lost property.

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