How Illinois Property Taxes Are Treated In Foreclosure and Bankruptcy

How Illinois Property Taxes Are Treated In Foreclosure and Bankruptcy

by Richard Fonfrias,

J.D. Chicago’s Financial Rescue &

Bankruptcy Lawyer

Fonfrias Law Group, LLC


Back Property Taxes in Bankruptcy

Chapter 7: If you’re filing a Chapter 7 (Liquidation) Bankruptcy, then property taxes that are less than one year old cannot be erased.  However, any property taxes that were assessed more than one year before you filed bankruptcy can be discharged.

Chapter 13:  If you’re filing a Chapter 13 (Repayment Plan) Bankruptcy, then you would repay property taxes just like you would repay other debts according to the terms of your repayment plan.

Tax Lien:  If your unpaid property taxes have become a tax lien against your home, then they can never be discharged in bankruptcy.  The tax lien will remain in place until you sell your home, when you’ll use the proceeds from the sale to pay off the lien.

Real Estate Sold for Property Taxes

A piece of real estate can be sold to pay delinquent property taxes. The owner has the legal right to reclaim his property by paying the full amount of the tax plus interest to the tax purchaser before a set deadline. If the owner does not reclaim the property before the deadline, then the owner loses his property and the tax purchaser gets a tax deed.

A bankruptcy filing can extend the deadline for the owner to reclaim his property by paying the taxes.  After a bankruptcy filing, the bankruptcy court must give its permission before the property can be sold at a tax sale and before a tax purchaser get a tax deed.

Property Tax Foreclosure

Even if you’re over a year behind in your property taxes, the threat of property tax foreclosure by your county (or whatever governmental agency collects your property taxes) is slim.  Your bigger concern is how your mortgage lender will respond, assuming you have a loan against your property.

The reason is that the terms of your mortgage require that you be current in paying your property taxes.  And if you are not up to date, then your lender could foreclose on your home, which would probably happen sooner than the county would foreclose for the taxes.

Property Tax Priority Over Your Mortgage

Your mortgage lender will be highly concerned if you’re behind in your property taxes because the property tax creditor (the county or other agency) has an interest that supersedes your home’s mortgage.  So if the county were to foreclose on your home for property taxes, that foreclosure would leave the mortgage lender without any security for its loan.

While this could happen, it almost never does.  This is because you make your property tax payments to your mortgage lender, who pays them to the governmental agency.  If you get behind in your tax payments, the lender usually pays them for you and then adds the amount to your house payments.

Chapter 7 Bankruptcy Doesn’t Help Much With Property Taxes

A Chapter 7 (Liquidation) Bankruptcy usually erases most or all of your debts that are not secured by your residence.  You may find that that generates enough money so you can catch up on property taxes.  In that instance, Chapter 7 Bankruptcy would be a good choice for you.

But if you’re behind on paying your property taxes, you’re probably also behind on your mortgage payments.  And if the lender has paid the property taxes for you, then you owe even more money to your mortgage lender.  So it becomes harder and harder for you to catch up on your payments.

In addition, Chapter 7 doesn’t protect you for very long – at most maybe three or four months on debts that are not erased in bankruptcy.  So after that, it’s up to your lender to decide how long you have to bring your account current.

Check with your bankruptcy lawyer to see how long your lender usually allows homeowners to catch up on their past due payments.

Chapter 13 Bankruptcy Helps Your Get Current on Property Taxes

In a Chapter 13 (Repayment Plan) Bankruptcy, you have three to five years to pay on past due accounts, including property taxes.  At the same time, you must keep current as property tax and mortgage payments come due.

In this payment plan, you make a single payment to the Chapter 13 trustee, who dispenses money to your creditors, including the agency collecting your property taxes.  While you can take the entire three to five years to pay your back property taxes, it’s better if you can pay them sooner so you don’t have to pay the high statutory interest rate.

Chapter 13 Bankruptcy Gives You Time To Bring Your Mortgage Current

If your mortgage payments are past due, then Chapter 13 Bankruptcy gives you time to bring them up to date in the same three to five year payment plan.  And during this time, your mortgage lender cannot foreclose on your home while you’re catching up on your mortgage payments and your property taxes.