New Jersey homeowners may have a chance to recover money lost on a home that has been through property tax foreclosure, thanks to a September decision of the U.S. Court of Appeals, Third Circuit (NJ and a few other states). The ruling affects homeowner equity—that is, the amount of money a homeowner could have kept, had the home been sold before the tax foreclosure was complete.
1. Background on property tax sales
When a homeowner fails to pay his or her property taxes, the unpaid amount becomes a municipal lien against the property. The homeowner’s township can then hold an auction to sell a tax sale certificate (TSC) for the amount of unpaid taxes. New Jersey law allows municipalities to auction TSCs to investors, and the winning bidder then becomes the “TSC holder.” If no one bids, then the municipality keeps the certificate.
What’s in it for the investor? The investor gets the right to collect up to 18% interest on the TSC (the interest rate is determined at the auction). After the auction, the TSC holder has the right to be paid the unpaid tax amount and interest from the homeowner.
The TSC holder also gets the right to foreclose on the home if the homeowner does not repay the full amount owed for taxes plus interest and any allowable fees within two years. This repayment is called “redemption” and must happen through the township tax office under New Jersey law.
2. Tax foreclosures
If a homeowner does not repay the full amount owed within two years, then the TSC holder can begin a foreclosure case against the homeowner. At the end of a tax foreclosure, in a stage called “final judgment,” the deed gets transferred to the TSC holder.
Because the deed to the home is transferred to the TSC holder at the end of a tax foreclosure, the TSC holder gets the windfall of all the equity (cash money) a homeowner may have built up in the home over a lifetime. In other words, a homeowner who owes only $5,000 in property taxes on a home worth $100,000 will lose the other $95,000 after the TSC final judgment. This is an unfortunate outcome for most homeowners.
3. A possible game changer
The Third Circuit decision that may give New Jersey homeowners some hope is called Hackler, after the name of the homeowner in the case. Because of the decision in Hackler, homeowners who lost their home equity through TSC foreclosures may be able to sell the home and get their money back, even after final judgment.
(1) The first way: The court in Hackler ruled that in some circumstances, a homeowner who lost equity in a TSC foreclosure may be able to get the equity back if they file a Chapter 13 bankruptcy within 90 days of the final judgment. In order to get the equity back in a Chapter 13 bankruptcy, the homeowner must have at least one other creditor who would have been able to receive money from the equity if the house had not gone through TSC final judgment. This method is called seeking to “avoid” the deed transfer as a preferential treatment.
(2) The second way: The ruling in Hackler also created another possible way to recover equity as a “fraudulent transfer” through a Chapter 13 bankruptcy within two years of the final judgment. This fraudulent transfer method would also require that the homeowner had at least one other creditor who would have received money from the equity. The court then looks at whether the TSC holder paid “reasonably equivalent value” (a “fair” amount) for the home. In TSC foreclosures the answer is almost always No.
In the Chapter 13 bankruptcy, the homeowner may be able to recover the deed for the limited purpose of being able to sell the house (or to possibly try and save the home). If the homeowner sells, then the TSC holder and other creditors will get paid what they were owed. The benefit to the homeowner is she or he will get the rest of the money from the home equity after sale.
Although this article discusses possible recovery of some equity after a TSC foreclosure, it is usually better for homeowners to take action before final judgment enters in the case. Hackler only applies to property tax foreclosures and does not apply to mortgage foreclosures.
Bankruptcy is very complicated and you should speak to a bankruptcy attorney before you consider filing to see if it is the best option for you. Legal Services may be able to help. To see if you are eligible for our services, complete an online intake at www.lsnjlawhotline.org or call our statewide toll-free hot-line at 1-888-LSNJ-LAW (1-888-576-5529).