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7th Circuit: Tax Lien Certificates – How Chapter 13 Bankruptcy Can Give Six Years to Redeem Tax Certificate in Indiana!

January 30, 2014

By:  Steven P. Taylor, Indiana bankruptcy attorney on January 30, 2014

Posted in Chapter 13 Bankruptcy

On January 7, 2014, the 7th Circuit court of appeals issued an opinion that is a fantastic boon for struggling real estate property owners that have not been able to pay their real estate property taxes timely and have had those delinquent real estate taxes sold at a tax sale.   These sale are conducted by municipalities who, after waiting the time period required by state law, those unpaid property taxes up for auction (generally called the “tax sale”). In Indiana, it’s about 15 months before a “property goes to a tax sale.”  The tax sale is bid competitively, meaning high bid wins. Unfortunately, Indiana has the reputation for being an excellent state for tax lien certificate sales for all of the wrong reasons.  First,  he interest rate on the bid that must be paid to redeem the property is high (as high as 25%) is high and the redemption period of 1 year is very short.

Tax Sale

Currently, under Indiana law, a tax lien purchaser in a tax sale gets a return on the investment in one ways: interest on the  bid amount, or eventual ownership of the property.

A.    Interest on Bid (Redemption of Tax Sale Certificate)

 If property for which a tax lien purchaser bought a tax sale certificate is redeemed during the redemption period,  the tax lien purchaser surrenders the  tax sale certificate upon that redemption, tax lien purchaser will receive a refund equal to one hundred ten percent (110%) of the minimum bid for which the tract or real property was offered at the time of sale, if the tract or item of real property is redeemed not more than six (6) months after the date of sale; or one hundred fifteen percent (115%) of the minimum bid for which the tract or real property was offered at the time of sale, if the tract or item of real property is redeemed more than six (6) months but not more than one (1) year after the date of sale. In addition to the refund of the minimum bid plus the above stated interest thereon, in the case of a redemption, the tax lien purchaser, upon surrendering a tax sale certificate, will receive a refund of the amount by which the purchase price exceeds the minimum bid (called the overbid), if any, on the real property plus ten percent (10%) per annum on the overbid.  I.C. §6-1.1-25-2 governs the amount required to redeem.


Assume that an Indiana homeowner owed $500 in unpaid property taxes on a property that went to tax sale.  A $5,000 offer is the winning bid at the auction. If the homeowner redeems his property the day before the one year redemption period expires, per  Indiana law, the minimum, he’ll owe the tax lien purchaser is the initial $500, plus a 15 percent penalty, totaling $$565.00. He’ll also be required to pay 10 percent interest on the overbid ($4500.00), or $450. As the tax lien purchaser, you’ll get your capital investment of $5,000 back, plus $65.00 plus interest payment of $450.oo on the overbid for a total of $5,515.00.

B.     No Redemption

Generally, about three quarters (3/4) of real estate owners redeem their real property within a year. However, if an interested party fails to redeem the property, the winning bidder can petition the Court, upon the expiration of the redemption period, to have a tax deed issued as to the property. Once it’s complete, tax lien purchaser takes ownership.

Typically, in Indiana, this accelerated and short redemption period is an extreme hardship on struggling Indiana homeowners that are attempting to save their home in these harsh times.  In the above example, it would require a homeowner to save an additional $459.58 a month to be able to pay the redemption amount and save the residence at the minimum.  To date, homeowners have had to hope that the mortgage company would come in and protect its lien.  However, the mortgage company wants its money it paid out on the tax lien redemption and will declare an escrow shortage (because that is where the money came from) and require the homeowner to pay  that escrow shortage over a twelve (12) month period.

However, In Re Lamont, the Seventh Circuit changed the tax lien certificate landscape.  The debtor in this Chapter 13 case filed a bankruptcy before the redemption period ended.  The plan provided for payment of the delinquent taxes at zero (0) percent interest over the plan life.  The tax lien purchaser (which was not listed originally on the schedules) became aware of the bankruptcy when the state court refused to issue a tax deed due to the bankruptcy.   The tax lien purchaser asked the bankruptcy court to modify the stay to allow him to obtain a tax deed.  The bankruptcy court refused and appellate proceedings ensued.  Specifically, the Court held that for debtor that filed a Chapter 13 bankruptcy before the expiration of the redemption period that the tax lien was a (1) non-recourse secured claim against the real estate owner’s property; and  (2)  the claim was modifiable in a Chapter 13 bankruptcy; and, (3) the automatic stay applies to prohibit the tax lien purchaser from attempting to procure a tax deed during the plan; and (4) the tax lien purchaser’s ability to obtain a tax deed is extinguished by the successful completion of the Chapter 13 plan and discharge.

Given the difficulties that  Indiana homeowners have in redemption due to the short redemption period and high interest, the Seventh Circuit’s holding is a blessing.  Unfortunately, this stance will require that an experienced bankruptcy attorney will be required to make sure that proper parties are noticed and the bankruptcy plan has the appropriate language.   However, Indiana homeowners with delinquent real estate taxes have gained breathing room to reorganize and save the real estate.  Potentially, this means that an individual whose real estate taxes were sold at a tax sale has the one (1) year redemption period (minus one day) plus the five year Chapter 13 plan life to pay the delinquent property taxes.  Since the tax lien purchaser’s secured claim is modifiable, the interest rate can modified to  a market rate (usually Prime to Prime plus 3%), vs the statutory rates in effect at redemption.

When I’m visiting with you by phone or in my Kokomo or Indianapolis bankruptcy law office, one thing I’ll want to find out is when your redemption period ends and call the county treasurer to ascertain the redemption amount.    Once we have those facts, you will be surprised at how we can help you keep your home and other real estate in Chapter 13 Bankruptcy.

One Comment
  1. Hi, great article. As much as I think you are right I don’t think that others will.

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