In the majority of home foreclosures where the homeowner decides to surrender the property, they are not responsible for the property taxes owed on it. Whoever purchases the property ends up paying the taxes. Often, it’s the foreclosing mortgage lender, and they either absorb the cost or pass it along in the purchase price when it gets resold. Thus, creating the general maxim: property taxes follow the property.
But this isn’t always the case. Here’s a cautionary tale, from when two parties on a land contract agreed that the tenant/buyer would be responsible for paying property taxes, rather than the landlord/seller.
As legal title of the house remained with the seller until the land contract reached maturity, the landlord remained liable to the county, notwithstanding the land contract agreement. The seller then paid the property taxes, and then filed a claim in the buyer’s Chapter 13 bankruptcy case (in which, the buyer decided to abandon the land contract and moved somewhere else).
11 U.S.C. § 523(a)(14A) makes non-dischargeable any debt that was incurred to pay particular kinds of taxes, referencing § 523(a)(1). Most commonly, this discourages people from using credit cards (which are non-dischargeable) to pay off tax debt (which is non-dischargeable) and sticking the credit card company with the bill.
Next, § 523(a)(1) references § 507(a)(8).At § 507(a)(8)(B) we have: 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.
So, where does this leave us? In the particular case described above, the portion of property taxes that the landlord/seller paid on behalf of the tenant/buyer, the portion of which was due within 365 days of the date the bankruptcy case was filed – that becomes non-dischargeable.
Why doesn’t this happen all the time? Because in Wisconsin, the mortgage company almost always folds the property taxes into the mortgage, and waives their right to collect a deficiency.