Tax purchaser’s interest is a claim in bankruptcy so it can be modified even if the period to redeem the taxes expires before the full redemption amount is paid

The issue addressed in In re: Todd Lamont and Christina Lamont, No. 13-1187 (7th Cir. Jan. 7, 2014) is how a tax sale purchaser’s interest should be treated in a bankruptcy commenced after the tax sale of the property, but before the period to redeem the taxes had expired. The tax buyer argued that its interest in the debtor’s property was an executory interest such that it acquires title if a certain event, i.e., the failure to redeem the taxes, occurs. Because the taxes were not redeemed within the time period allowed by statute, the property should pass to him as his interest was not a secured claim treatable under a Chapter 13 plan. The debtors argued that a tax purchaser’s lien is merely a secured claim and that it was proper to pay it through a Chapter 13 plan, even if the redemption amount is not completely paid before the redemption period expires. In affirming the lower court’s ruling for the debtors, the Seventh Circuit noted that Illinois courts have long held that a tax sale purchaser’s interest is treated as a tax lien, more specifically a species of personal property, a lien for taxes. Furthermore, prior to the end of the redemption period and the issuance of a tax deed, the tax sale purchaser has no equity or title to the property. The debtor owns the property both legally and equitably until the redemption period expires.
The definition of claims under the bankruptcy code includes claims against the debtors’ property so, upon filing for bankruptcy, the property becomes part of the bankruptcy estate. Therefore, the expiration of the redemption period while the debtors’ Chapter 13 plan was pending did not affect the plan’s treatment of the tax sale purchaser’s claim. The court rejected the tax purchaser’s analogy that it should be treated like a purchaser in a mortgage foreclosure sale, noting that in the tax sale context, before the redemption period expires the property still belongs to the delinquent taxpayer. In a mortgage foreclosure sale, by contrast, the sale occurs only after the mortgagor’s statutory and equitable rights of redemption have expired. At that point the foreclosure purchaser obtains a presumptive right to own the property subject only to confirmation by the court. So even though the redemption period might pass while the bankruptcy is pending, a Chapter 13 plan may modify a secured claim and pay it over the course of the plan.

Download Related Document