Discharging Property Taxes in Chapter 7 Bankruptcy

Taxes is one area where the government, the author of the bankruptcy laws, created certain exceptions for itself.  First, as you may know, a discharge in Chapter 7 bankruptcy expressly excludes certain income taxes. The general rule is that if the income taxes were due in the past three years then they are likely to be non-dischargeable, but obviously you need to look at them with your lawyer.

The other tax  that often comes up in chapter 7 is the property tax. As you can imagine once a debtor starts to fall behind and becomes unable to pay the bills then property taxes are often included in that group. It is often by default because most opt to pay the property taxes into escrow to be paid by the mortgage company. hence, no mortgage payment no property tax payments. While the dischargeability of the property taxes is not as common an occurrence it is important to understand your legal rights.  Y

The Bankruptcy Code lays out which debts can and cannot be discharged in bankruptcy. As for non-dischargeable debts, section 523(a)(1)(A) states that taxes of the kind and for the periods specified in Section 507(a)(8), regardless of whether or not a claim for such tax was filed or allowed.

Section 507(a)(8) reads “allowed unsecured claims of governmental units, only to the extent such claims are for . . . (B) a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition.”

Therefore, generally speaking, property taxes due within the year preceding a bankruptcy filing are non-dischargeable. If you file on January 1, 2015 and your 2014 tax bill was due in the middle of the year in 2014 as it is the case in Maryland then the 2014 property taxes would be non-dischargeable.

On the other hand, property taxes for years 2012 and 2013 would be most likely dischargeable if the last day to pay them without penalty fell outside of the one year period or otherwise that date was before December 31, 2013.

Now, even with the non-dischargeability, most property owners know that the property cannot be transferred unless those taxes are paid because they cloud the title. By statute there is an automatic lien on the property for unpaid taxes. These statutory liens put potential buyers on notice that the property is encumbered by unpaid property taxes.  Therefore, in most instances, property taxes are paid even though it may be months or year down the line when the property is transferred either through foreclosure or a normal sale.