Property Taxes in Chapter 13 Bankruptcy: Paid or Not, and at What Priority if So?
Are Property Taxes "Priority Unsecured Debts" in Chapter 13 Bankruptcy?
Property taxes in Chapter 13 bankruptcy in Michigan are classified according to certain categorizations established by the Federal Bankruptcy Code: administrative, secured, priority unsecured, and unsecured. These classifications are especially important in Chapter 13 bankruptcies, in which the class of a debt determines in what order and to what extent the debt is paid by the Chapter 13 Trustee through the Chapter 13 payment Plan. Priority unsecured debts are paid second-to-last in a Chapter 13 Plan, and, in either a Chapter 7 or a Chapter 13 bankruptcy, a "priority" classifications generally means that the debt is non-dischargeable. Income taxes, along with child-support and spousal support payment deficiencies, intentional tort lawsuit damage awards, unpaid wages owed to employees, contributions to employee benefit plans, certain claims of farmers or fishermen, and others, are, generally, priority unsecured debts that are not dischargeable. (There are circumstances in which tax debts can be discharged, however!) Section 507(a)(8)(B) of the Bankruptcy Code specifies that property taxes, likewise, are priority unsecured debts.
Property Taxes: No Need to Pay in Michigan if Surrendering the Property
What is the upshot of this? It depends upon whether you are filing Chapter 7 or Chapter 13 bankruptcy, and it depends upon whether you are surrendering or retaining the real estate from which the property tax arises. If you are surrendering the home in Chapter 7 or Chapter 13 (this can be done in either Chapter), the property tax debt will run with the land under Michigan law. This means that the foreclosing bank or subsequent purchaser, after the post-bankruptcy foreclosure sheriff's sale, will be responsible for paying the property taxes and they need not be treated in your personal bankruptcy as there is no "personal liability" that results from them. In other words, your city can't pursue you after your bankruptcy to collect the property taxes. If you are keeping your home, however, the property taxes, of course, must be paid. In a Chapter 7 bankruptcy, a priority debt is listed as such in your petition and simply not discharged---not affected---by the bankruptcy. In a Chapter 13, however, the debt must be paid through the Chapter 13 Plan and must be paid in full within a maximum of 60 months, which is the maximum length of a Chapter 13 payment Plan. The ability to catch up back property taxes or mortgage payments at 0% interest is one of the great benefits of a Chapter 13 Bankruptcy, in fact, especially given that the priority debt must and will be paid in "priority" order over other miscellaneous unsecured debts such as credit cards, medical bills, lines of credit, and personal loans. Just as Chapter 13 can help you in this way save a home from foreclosure by the bank holding your mortgage, a Chapter 13 can also help save a home from tax foreclosure by the city, township, or county. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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