Property Tax Lien and the Automatic Stay of Bankruptcy

One common question in bankruptcy comes from filing debtors who may be facing a property tax lien and foreclosure on their property. They want to know if the automatic stay in their bankruptcy case will stop the foreclosure process.

One such filing debtor recently was quoted on a bankruptcy forum website as stating: “I filed a chapter 7 asset bankruptcy in Nov. 2011 for personal and business reasons…The bankruptcy trustee has left my case open with no movement to close since April 2012. My past due property taxes were included in schedule E and a claim has been filed against my assets. Can my business property still be foreclosed on, or is the automatic stay still in place?”


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A Tax Lien Results (Photo credit: danielmoyle)

History Behind a Property Tax Lien and the Automatic Stay

Since the adoption of the Bankruptcy Code in 1978, both the courts and the legal community assumed that a bankruptcy petition had no effect on the regular imposition of a property tax lien. In particular, bankruptcy courts gave frequent recognition to a post-petition property tax lien.

In 1992, three decisions by the Second and Third Circuits ruled the imposition of a property tax lien was subject to the automatic stay provisions of Section 362 of the Bankruptcy Code. Since 1992, post-petition taxes can be treated by a bankruptcy court the same as any unsecured debt and held to the automatic stay of bankruptcy. Whether this happens or not depends on the type of bankruptcy filed and the bankruptcy district court handling the case.

The Problem with a Property Tax Lien and the Automatic Stay

If you are filing a chapter 7 bankruptcy like the debtor in the above illustration, pre-petition and post-petition taxes can become a problem with the use of the automatic stay in bankruptcy. Taxes that are incurred before the filing date of bankruptcy are considered pre-petition taxes and those incurred after the filing date are considered post-petition taxes.

Debtors in bankruptcy are generally not allowed to pay any of their pre-petition debts without the permission of the bankruptcy court. These can include tax liabilities. If you are filing a chapter 7 bankruptcy, you can have a tax problem because the time it takes to finish the bankruptcy can cause you to be delinquent on paying your property taxes. A property tax lien can be the result of delinquency. The only good news when this happens in bankruptcy is that the automatic stay prevents any penalties, fees, or interest to be assessed to the tax liability during the bankruptcy process.

Even though the automatic stay means you do not have to pay your taxes until the bankruptcy is completed, post-petition taxes should be paid during a bankruptcy if at all possible. Property taxes are considered part of the costs for maintaining and administering the bankruptcy estate. A bankruptcy court will generally provide you permission to pay your property taxes if addressed to do so. Taxing authorities maintain their rights to assess property taxes and pursue a property tax lien when appropriate.

Filing a bankruptcy can stop the foreclosure process caused by a property tax lien through the use of the automatic stay of bankruptcy. Ask your local bankruptcy attorney if you have more detailed questions about any problems arising from a property tax lien and bankruptcy.





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