Most people are familiar with mortgage foreclosure, but many homeowners don’t realize that even if their mortgage is paid off, they can still lose their home to foreclosure if they don’t pay their taxes.
In this article, we’ll break down the most important things you need to know about how tax foreclosures work, including what a property tax lien is, how the tax foreclosure auction works, and how to stop property tax foreclosure.
If you are behind on your property taxes and are at risk of a tax lien foreclosure, it is important to speak with an attorney as soon as possible to make sure you know all of your tax foreclosure rights. Contact us to schedule a free consultation with Denbeaux today.
What Is A Tax Foreclosure?
A tax foreclosure is when your home is foreclosed on because property taxes (and related fees) have not been paid. This is different from a mortgage foreclosure, which happens when a homeowner is behind on their mortgage payments and the lender forecloses to recover the unpaid loan balance. In a tax foreclosure, the municipality (usually a town or county) initiates the foreclosure to recover unpaid taxes.
Because most people associate foreclosure with mortgage payments, homeowners often don’t realize that their house can be foreclosed on even if their mortgage is completely paid off. This is because the foreclosure is for property taxes, not the mortgage. Even if the tax debt is small compared to the value of the house, the home can still be foreclosed to recover the amount owed on the tax lien.
How Do Tax Liens Work?
When you fall behind on your taxes, the government puts a “tax lien” on your property. A tax lien doesn’t automatically give the government the right to your home. Instead, it puts a legal claim on the home. It’s the government’s way of saying that they are owed money and that the home is being used as collateral. It’s important to be aware that tax liens in New Jersey are not limited to your property taxes and also include any unpaid water or sewer taxes.
Once a tax lien is placed on your home, you typically aren’t able to sell the property or borrow against it until the tax debt is settled. Once the taxes, interest, and any fees are paid, the lien will be removed.
A tax lien doesn’t automatically give the government the right to your home, but if the lien goes unpaid, it may be sold at an NJ tax sale, and the property may go into foreclosure for property taxes.
The Property Tax Foreclosure Process
Step 1: Missed Tax Payments
If you are behind on tax payments, a tax lien will be placed on your property.
If you are unable to pay your tax debt, your home will be sold at a tax foreclosure sale to recover the unpaid balance. There is no specific number of days you have between when a tax lien is placed on your home and when your home can be sold at a tax foreclosure sale, but it is typically about a year.
For tax liens in NJ, municipalities are required to hold at least one tax foreclosure sale each year for unpaid taxes from the prior year. This means if you miss paying your tax lien in New Jersey for a year, your property would likely go to the next tax foreclosure sale.
Step 2: Tax Foreclosure Auction
If the tax lien isn’t repaid, the municipality can sell the lien at a tax foreclosure auction, often called a tax sale. Towns do this to recover unpaid taxes sooner so they can use the money to fund local services.
At NJ tax sales, investors can bid on the lien. In some cases, investors will bid even more than the total tax debt owed to win the auction. Investors will pay more than the total lien amount because they know they can make money from the interest and fees they’ll be owed by the homeowner.
The winning investor will pay the amount owed to the municipality and, in return, will own the lien on the property. At this point, the ownership of the lien transfers from the municipality to the investors. If there are no bids on the tax lien, ownership of the lien will remain with the municipality. In many cases, the town is not required to notify the homeowner when a tax lien transfers to an investor, so it is important to follow up on the sale to determine who now owns your lien.
The tax sale only determines who owns the lien on the property, meaning who will be owed the amount of unpaid taxes, interest, and fees. At this point in the process, the lienholder only has the rights to the unpaid debt, and the homeowner still owns the home and has full ownership rights.
Tax Redemption Period
After the tax sale, the homeowner will have an opportunity to pay the amount owed to “redeem” their home, known as the tax redemption period, before the home can enter foreclosure.
How far behind on property taxes before foreclosure can begin will vary by state. For New Jersey tax liens, the tax redemption timeline depends on who owns the lien and whether you live in the house. If you moved out of the home, there is no redemption period, and foreclosure can start immediately after the New Jersey tax sale. If you live in the home, the redemption period is two years if your lien is owned by a third-party investor, and six months if it is owned by a municipality.
This redemption period is the time homeowners have to repay their lien before the foreclosure process begins. However, even if the lienholder starts the foreclosure process, the homeowner can still redeem their property as long as they pay off the total debt before the final judgment.
Foreclosure Begins
If the homeowner is not able to pay the lien back by the end of the redemption period, the investor or town that owns the lien can initiate foreclosure. In a foreclosure, the goal of the lienholder is to ask the court for the title to your home so it can be sold to repay the debt owed for the unpaid lien, interest, and fees. If the court approves and enters a final judgment, ownership of the property can transfer to the lienholder, even if the house is worth more than the taxes and fees that are owed
The foreclosure process does not officially begin until the lienholder files a Complaint. Once you receive a Complaint, there is a specific amount of time you have to respond. If you receive a Complaint and don’t answer, the court can enter a default judgment, which means the lienholder automatically wins the case because you didn’t reply.
To avoid a default judgment, you will need to file an Answer within the required time period. If your lienholder is a municipality, you typically have 45 days to respond. If your lienholder is an investor, you typically have 35 days to respond.
Not responding can cause you to lose your rights to fight for your home and may also impact your right to recover any surplus equity from the property.
Homeowner Rights In Property Tax Foreclosure
If you are facing property tax foreclosure, it is important that you understand your rights around surplus equity. Surplus equity refers to the amount of equity (money) left over after your foreclosure debts are paid, including your mortgage, taxes, and other liens. For example, let’s say your home goes into tax foreclosure because you owe $10K in taxes, it is sold for $300K, and you have no other liens. In this case, you have $290K in surplus equity.
Unfortunately, many homeowners are unaware that they are entitled to this surplus equity and lose it to surplus equity scams. Other homeowners may be aware that they have surplus equity, but don’t realize they don’t automatically get it.
Under New Jersey law, homeowners are entitled to their surplus equity. However, to get it, they have to send a letter stating they want to preserve their surplus equity and requesting the home be sold at a sheriff’s sale or online auction. Legally, homeowners need to be notified of their right to request a sheriff’s sale, but that doesn’t mean it always happens.
Talk To A Property Tax Foreclosure Attorney
As long as the court has not entered the final judgment, you still have options to save your home. An experienced attorney can advise you on how to stop property tax foreclosure, such as getting a grant or bank loan to pay off the tax lien or filing for Chapter 13 bankruptcy.
An attorney can also review your case to determine who owns the tax lien, whether the required notices and foreclosure laws were followed, and what options are available to protect your home or surplus equity.
Contact Denbeaux Law for a free initial consultation to learn more about your options to protect yourself from foreclosure and property taxes.
