Tag Archives: Foreclosure

If I Do Not Pay My Property Tax Will The County Take My Property?

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If you do not pay your property taxes for quite a few years your county can conduct a tax lien sale to sell your house out from under you to pay back the unpaid property taxes. When does a property owners’ legal and equitable interests in their property terminate so that filing for bankruptcy protection cannot stop a tax lien sale in California? To ask the question a different way, when can a homeowner file bankruptcy and stop the tax lien sale of their home? This article will focus on California property tax law and how real property can be sold to pay unpaid property taxes.

California Property Tax Law

In California real property taxes (land) are secured by and serve as a lien on the real property for which they are assessed. Property taxes that are secured that remain not paid at the end of the fiscal year (June 30 of each year) are deemed to be in default. See California Revenue and Tax Code Section 3436. For residential properties if the property taxes are defaulted and not paid for five years then the county has the right to satisfy the outstanding defaulted taxes by selling the property at a tax lien sale. See California Revenue and Tax Code Section 3691. For a nonresidential commercial property only three years has to go by before the county and sell the real property. The real property will be sold at public auction, which now includes the internet, to the highest bidder.

Homeowners that are behind on their property taxes have a right to redeem the property by paying all prior defaulted taxes in full with penalties, costs and fees. When does the right to redeem terminate? California Tax and Revenue Code Section 3707 governs termination of the redemption period. Section 3707(a)(1) provides the right of redemption terminates at the close of business on the last business day prior to the date of the sale. After the tax lien sale is determined or deemed complete a homeowner’s right to redeem the tax defaulted real property cannot be revived under California Tax and Revenue code Section 3707. After the tax lien sale is completed the county tax collector will execute a deed to the purchaser. This tax deed will convey title to the purchaser free of all encumbrances (loans or other liens) of any kind existing before the sale.

What Is California Law Regarding Voluntary and Involuntary Foreclosure Sales?

This question can is answered by looking further at California law as it relates to the Bankruptcy Code. As soon as a bankruptcy petition is filed the automatic stay takes effect stopping any and all collection activity including tax liens sales if the bankruptcy filer still has the right to redeem the property. Section 541 of the Bankruptcy Code governs what is property of the bankruptcy estate upon the filing of a petition for relief. A bankruptcy filers right to redeem their real property is a distinct property right from the bankruptcy filers legal and equitable interests in the real property. See Harsh Inv. Corp. v. Bialac (In re Bialac), 712 F.2d 426, 431 (9th Cir. 1983). Section 541 provides the definition of property of the bankruptcy estate is very broad. The California Tax and Revenue Code says that legal title to a tax defaulted real property will transfer after the tax sale with the recording of a tax deed by the tax collector. California Tax and Revenue Code unfortunately does not provide when equitable title to the tax defaulted real property transfers to the purchaser during the tax lien sale process.

In an ordinary non-tax lien sale of a piece of real property to a third party under California law provides the transfer of legal title at the time of execution of the contract of sale, the grantee acquires an equitable title to the estate being sold and the person selling the property, the grantor, retains the legal title as security for the purchase price. The legal title passes to the purchaser, grantee, at the time of their completion of the conditions precedent…..

In an involuntary sale like a foreclosure sale equitable title under California law is transferred to the purchaser at the foreclosure auction with acceptance of the highest bid and at the time a trustee’s sale is completed. See In re Richter, 525 B.R. 735, 745 (Bankr. C.D. Cal. 2015) (citing Nguyen v. Calhoun, 105 Cal. App. 4th 428, 441 (Cal. Ct. App. 2003). These cases provide the trustee’s sales is completed upon acceptance of the highest bid. Legal title remains with the owner or debtor and if the owner/debtor files for bankruptcy protection after the foreclosure sale there are grounds to not allow the bankruptcy to stop or stay the foreclosure sale process to allow the equitable owner to obtain legal title to the foreclosed real property. Bankruptcy attorneys have to find out the exact sequence of events to determine the debtor’s legal rights at the time the bankruptcy case is filed.

At What Point Can A Homeowner File Bankruptcy But Not Stop the Tax Lien Sale?

So, at what point can a homeowner file bankruptcy but it will not stop the tax lien sale? The Ninth Circuit Bankruptcy Appellate Panel on February 3, 2017, published an opinion, In re RW Meridian, LLC; BAP Case No. SC-16-1227-JuFY, that addresses this question. The bankruptcy petition has to be filed prior to the tax lien sale being completed.

The 9th Cir. BAP held that the bankruptcy filer was not divested (lost) of its legal or equitable interests in the underlying real property by operation of law upon the expiration of the bankruptcy filers right to redeem the real property under California law. The Court further held t6hat before a bankruptcy filer (debtor’s) equitable interests in the real property could transfer the tax lien sale process requires the taxing collector to hold an auction, and at the very least accept the highest bid, or at most, the tax collector receive the purchase price before the sale can be considered “complete.” California Tax and Revenue Code Section 3707(c) says that a tax sale is not complete until the purchase price has been paid in full which is a later point in time than in a foreclosure sale when it is acceptance of the highest bid which passes equitable title.

SO, if the auction or there is no acceptance of the highest bid before the bankruptcy petition is filed the tax lien sale was not completed and the bankruptcy filer can stop the tax lien sale. In the RW Meridian, LLC, bankruptcy case the Ninth Cir. BAP held neither the auction or acceptance of the highest bid took place prior to the property owner filing for bankruptcy protection. There was no transfer of the debtors/bankruptcy filers legal or equitable interests in the real property prior to filing the bankruptcy petition by the owners bankruptcy lawyer. The 9th Circuit Bankruptcy Appellate Panel held that there are no provisions of the California Tax and Revenue Code about tax lien sales provides that the expiration of the right to redeem prevents a bankruptcy filer of their equitable or legal interests in the real property upon filing of bankruptcy protection.
The key to all of this is that the alleged tax lien sale took place after the real property owner filed for bankruptcy protection.

County Argued Ministerial Acts Exception to The Bankruptcy Automatic Stay

Given the 9th Cir. BAP concluded the bankruptcy filer had equitable and legal interests in the real property the tax collector county violated the automatic stay that took effect when the bankruptcy case was filed. The county tax collector argues the postpetition sale of the real property falls within the narrow ministerial exception to the automatic stay. The Ministerial Acts exception says the automatic stay does not prohibit ministerial acts or automatic occurrences that entail no deliberate, discretion or judicial involvement on the part of the actor. See McCarthy, Johnson & Miller v. N. Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1080 (9th Cir. 2000). The Ministerial Acts exception can apply to the simple recording of a tax deed after a tax lien sale was completed after a bankruptcy petition is filed. Completing the actual tax lien sale process by accepting the highest bid is not a ministerial act.

What Happens If My House Is Foreclosed On Before Filing Bankruptcy But Recording of the Trustee’s Deed Is After I File Bankruptcy?

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If you are trying to save your house from foreclosure the best way to avoid any confusion is to file for bankruptcy as soon as possible before your trustee sale date. Once your bankruptcy case is filed there is an automatic stay in place to prevent the sale of your home. If the trustee sale still goes through, the sale will be voided as it is in violation of the automatic stay.

What happens when you filed your bankruptcy case after the trustee sale was conducted but before the trustee’s deed is recorded with the county? Pursuant to California Civil Code Section 2924h(c), “…the trustee’s sale shall be deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if the trustee’s deed is recorded within 15 calendar days after the sale…”

The courts in California are divided over the interpretation of this issue. One court in the Northern District of California indicated that if the bankruptcy case was filed after the trustee’s sale but before the recording of the trustee’s deed, the recording of the trustee’s deed is not a violation of the automatic stay and the secured creditors can proceed, making the foreclosure final. In Re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997). In the Garner case, Minnie Bee Garner defaulted on her mortgage and her home was foreclosed on March 11, 1997. She filed for Chapter 13 bankruptcy protection on March 12, 1997. The foreclosure sale deed was issued to the third party purchaser on March 13, 1997 and the third party purchaser recorded the deed with the county on March 18, 1997. The secured creditor’s bankruptcy attorney filed a motion for relief from stay and the court granted it and held that as long as the deed was recorded within 15 days of the sale, issuing the deed did not violate the automatic stay. Therefore, the third party purchaser’s interest in the property was not avoided by the filing of Ms. Garner’s bankruptcy case.

A more recent case in the Central District of California held differently than Garner above. In In re: Gonzalez, Case No. 6:11-BK-15665-MW (C.D. Cal. 2011), there was a foreclosure sale of Mr. Gonzalez’s property on February 22, 2011. Mr. Gonzalez filed for bankruptcy on the same day. The exact time of the final bid is uncertain but for purposes of the case the exact time and whether the foreclosure sale went through before or after Mr. Gonzalez filed for bankruptcy did not matter. The deed was recorded with the county recorder’s office on March 2, 2011. The judge in this case held that at the time the bankruptcy petition was filed Mr. Gonzalez still held title to the property because the deed was not recorded yet. The subsequent filing of the deed after the bankruptcy petition was filed violated the automatic stay and therefore the recorded deed is void. The judge goes on to say that the provision of the California Civil Code Section 2924h that deems the sale to be final as of 8 a.m. on the actual date of sale does not matter because the deed filed with the county was void, and execution of a voided deed is a void act and does not create or perfect title. Upon appeal of this decision to the District Court for the Central District of California the Bankruptcy Court judge’s ruling was reversed. Like in Garner, the recording of the deed of trust was not a violation of the automatic stay.

This is a perfect example of similar facts but different outcomes even though they are all from the state of California. Maybe legislation will resolve this issue in a future time so there is no more confusion. As of right now if you have any issues you should consult a bankruptcy lawyer. The best way to avoid this issue is to make sure your bankruptcy case is filed at least a day before your trustee sale date. So that is what happens if your house is foreclosed on before filing bankruptcy and the recording of the trustee’s deed is after you file bankruptcy.

Foreclosure and What are the Tax Consequences, Do You Have to File For Bankruptcy?

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These past couple years have been very hard on homeowners, with homes being foreclosed left and right.  If you have been caught in this crisis as well, you may need to know what your options are after your home is foreclosed, and whether one of those options includes bankruptcy.

If your residential property was foreclosed and you only had one mortgage on the property, then you may not need to file for bankruptcy since the creditors cannot go after you for any deficiencies due to the One Action Rule.  However, under normal circumstances, even if the creditors do not go after you for the deficiency, you may still owe a hefty chunk to the taxing authorities, the Internal Revenue Service (“IRS”) and California’s Franchise Tax Board (“FTB”).  That is because the taxing authorities could treat the cancellation of debt as a taxable event since you did not have to pay the deficiency to the mortgage creditor, and thus the money you did not have to pay them is considered income.  This is a harsh double whammy for homeowners who have lost their home, and now they have a hefty bill they need to pay the taxing authorities.

Since the foreclosure rates have been so high in the most recent years, the federal and state governments have created temporary laws that would help ease the financial hardship of homeowners who have lost their homes.  IRS created the Mortgage Forgiveness Act of 2007, which forgives up to $1 million in debt for the deficiencies related to the foreclosure of a primary home for a single or married filing separate taxpayer and up to $2 million for a married couple.  The debt has to be related to the house, either building, improving, or maintaining it.  There could be multiple mortgages on the house, and as long as they were all used for the property, you would not have to pay taxes on the cancellation of that debt.  The trouble that a lot of homeowners run into is the fact that sometimes the second mortgages are taken out to pay off their credit card debt or buy new cars, which have nothing to do with the house.  If that is the case, the deficiencies on that debt are still a taxable event to the IRS.

California has a similar program that protects homeowners who have lost their homes in a foreclosure.  They exclude up to $250,000 of debt for deficiencies related to foreclosure of a primary residential property for a single or married filing separate taxpayer and up to $500,000 for a married couple.

Since both the federal and state governments are protecting only primary residences, if you have a rental property, or business property, or even second mortgages that were taken out to pay off debt that is not related to your home, the cancellation of such debt are still considered taxable events.  If you are in this situation, please contact our Fremont bankruptcy lawyers or Union City bankruptcy lawyer today at 877-9NEW-LIFE or 877-963-9543 today.