Delinquent Property Tax Claims in Chapter 13 Cases

 Property taxes on real estate in Kentucky constitute a statutory lien on the property. Under state law (KRS Chapter 134), the lien has priority over any other debt on the property. If the property were to be sold, property tax claimants are paid ahead of any mortgages or other liens. How should delinquent property tax claims be treated in a chapter 13 case? Practitioners first need to understand what happens to delinquent property taxes under state law.

When property taxes are unpaid as of April 15 and the sheriff files the uncollected tax claims with the county clerk, those unpaid tax bills, along with certain fees and costs, become certificates of delinquency which can be and frequently are sold to third party purchasers.

The purchaser of the certificate of delinquency is now the first priority lienholder. The lien secures not only the tax owed, but interest, penalties, fees, commissions, costs, attorneys’ fees, and other allowable expenses.

Under Kentucky law, the owner of a certificate of delinquency for unpaid property taxes is entitled to receive interest at 12% only on the amount paid to purchase the certificate of delinquency. The creditor may also recover reasonable attorneys’ fees and certain other fees and expenses, but ordinarily the creditor does not get interest on those fees and expenses.

When a debtor files a chapter 13 case, those delinquent property taxes are secured claims with first priority status. Assuming the property is worth more than the taxes owed against it, those claims are fully secured and have to be paid that way in the chapter 13 case.

These liens cannot be avoided like judgment liens can be under section 522(f). They cannot be stripped off like junior mortgages. Under state law, they are ahead of first mortgages, IRS tax liens, and other encumbrances.

Because these are tax liens, they get paid interest at the same rate and in the same manner as they would get under state law pursuant to section 511 of the Bankruptcy Code. That means in the chapter 13 case, the holder of a certificate of delinquency is to be paid interest at 12% on the amount paid to purchase the certificate of delinquency. The rest of the claim for accrued interest, collection costs, attorneys’ fees, etc. is part of its secured claim that must be paid in full, but that portion of the claim does not get interest.

It is important for the claim to contain an itemization of how much was paid for the certificate of delinquency and what makes up the rest of the claim. I need the information in order to split the claim into a secured interest-bearing claim and a secured claim without interest. Debtors and their attorneys need the information to ensure the fees and expenses are allowable under KRS Chapter 134.

That being said, there is an exception. In a recent EDKY decision, the bankruptcy court held that if the creditor reduced its claim to judgment in state court before the chapter 13 petition was filed, the bankruptcy court is bound by the state court’s determination of the amount of the claim. Once there is a judgment, the creditor need not itemize in its proof of claim how much it paid for the certificate of delinquency and how much of the claim amount is for fees and costs; the bankruptcy court cannot independently review the state court’s judgment to determine if interest was properly calculated.

Furthermore, if the state court awarded post-judgment interest on the entire amount of the judgment, a claim for that post-judgment interest is allowable in the chapter 13 case, and interest in the chapter 13 case will have to be paid pursuant to the judgment. The creditor in this case is essentially asserting the right to be paid interest at 12% on its attorneys’ fees, accrued interest, and other fees and expenses that constitute the amount of the judgment.

Keep in mind that this creditor is asserting a right to post-judgment interest under KRS 360.040 (interest on judgments). This is different from the interest that is allowable under KRS Chapter 134 (interest on certificates of delinquency).

The bankruptcy court queried whether the claim for post-judgment interest under KRS 360.040 would have the same super-priority status as the claim for property taxes has under KRS Chapter 134, but the issue was not ripe for determination. I can see that question having significance in a case where the value of the property is less than the aggregate amount owed on delinquent property taxes. Otherwise, I don’t think it matters. If there is value in the property to support the secured claims, those claims will have to be paid in full. But it will be much more expensive for the debtor to pay interest at 12% on an $8,000 judgment than on a $600 certificate of delinquency.

If you want a really good primer on delinquent property taxes in Kentucky, look at “What Bankruptcy Attorneys Should Know About Delinquent Property Taxes” in the seminar materials from the 2016 UK Consumer Bankruptcy Law Conference. If you didn’t attend the seminar, go to http://ukcle.com/ (look under the Publications tab) to buy the materials ($55 for the entire seminar PDF).

4 comments

  1. Thanks Beverly:
    As a practical matter, are we to separate the figures in the description of the claim on the petition? Will that work for your office? On the plan do you want us to put the two figures with an explanation in special provisions? I’m not sure how we would incorporate this into the secured claims portion of the plan as currently drafted.
    Caryn Belobraidich

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    1. Caryn-good question. Splitting it on the schedules or the plan might make a difference in the initial plan analysis (“plan calc”) we do for feasibility. Ultimately though, because it is a tax claim, we pay per the proof of claim, not per the plan. I suggest listing delinquent property tax claims under the section of the plan for claims not subject to valuation, because the claims are first priority so it is rare that the claims will be reduced based on the property’s value. If you can break it out, that will give us a better idea of whether the plan will be feasible, but it isn’t crucial to break it out. It is much more important for debtors’ attorneys to: (1) review the claims filed by creditors; and (2) to file secured claims on behalf of those property tax creditors who choose not to file claims.

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  2. Reblogged this on Kentucky Bankruptcy Law and commented:
    In my practice, I have found it important to do just as this post advises: review claims filed carefully to make sure interest accrues only as allowed by law and for the attorney fees added in. Statue also guides the amounts that can be charged in attorney fees.

    Furthermore, it is incredibly valuable to make sure the Debtor gets a copy of ALL active liens on their property just prior to filing the Chapter 13. And, after the bankruptcy is filed, to make sure the claims are filed on all of those liens. It just makes things nice and clean when the Chapter 13 concludes.

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