The Short Answer
How a property tax lien is handled in bankruptcy depends on whether you file Chapter 7 or Chapter 13 — and whether the taxes were owed before or after you file. The one constant: property taxes cannot be discharged in bankruptcy, so you remain legally responsible for them as long as the property is in your name. In Chapter 7, taxes on surrendered property are typically satisfied when the property changes hands, so you usually don't have to pay them out of pocket. In Chapter 13, taxes owed as of your filing date get folded into your repayment plan, while taxes that come due after filing must be paid directly to the taxing authority.
There are two types of tax liens: property tax lien and income tax lien. Both liens have an impact on your bankruptcy, but the treatment may be different. The treatment is also dependent upon the type of bankruptcy you file, Chapter 7 bankruptcy or Chapter 13 bankruptcy. In this blog, we will discuss how a property tax lien is handled in your bankruptcy.
If you own real or personal property, the city or county in which you live will most often levy taxes based on the value of the property.
Real property includes houses, condominiums, townhouses, land, etc. Taxes on real property is a lien and attaches to the property. As a result, the taxes must be paid in full or the city or county taxing entity may foreclose on the real property. In almost all jurisdictions, the city or county tax lien is in first position to be paid and even has priority over the first mortgage on the property.
Personal property includes automobiles, motorcycles, trailers, assets of businesses, etc. Taxes on these items are a lien on the assets themselves, but in most jurisdictions, the lien can be attached to any real property you own as well.
Now that there is a general understanding of what is included in real and personal property, let’s understand the impact bankruptcy has on these taxes. It is important to understand that property taxes cannot be discharged in bankruptcy and that you are legally responsible for the taxes until the asset is no longer in your name.
Chapter 7 Bankruptcy:
If you are filing a Chapter 7 bankruptcy, you will be held responsible for any taxes that have been assessed against you. If you are surrendering a house in a Chapter 7 bankruptcy, the taxes will be assessed against you for as long as you are the legal owner of the property. The property legally belongs to you until it is conveyed to a new owner by purchase, foreclosure, deed in lieu of foreclosure, quit claim deed, etc. Although these taxes are assessed against you, often it is not necessary to pay them since the taxes are a lien on the property and will be paid at the time the property is conveyed to the new owner. For example, if the house is surrendered in bankruptcy, the taxes will be paid by the mortgage company when the property is foreclosed on. If you are surrendering a vehicle in a Chapter 7 bankruptcy, you will incur taxes until the taxing entity has noted you are no longer the owner of the property. You should contact your local taxing authority to determine the proper procedure for notifying them that you are no longer the owner of the vehicle. In some cases this means surrendering the license plates on the vehicle or it may means showing that the title of the vehicle has been legally transferred to another person or entity.
Chapter 13 Bankruptcy:
If you are filing a Chapter 13 bankruptcy, the taxes on real or personal property owed on the date of bankruptcy filing will be included in the Chapter 13 bankruptcy payment. This would include any taxes due and payable as of the date you file bankruptcy. For any taxes incurred after the date of bankruptcy filing, you will need to pay those taxes directly to the taxing entity; they will not be paid in your bankruptcy. For example, if you have not paid last year’s $200 personal property tax assessed on your vehicle, it will be included in your monthly Chapter 13 bankruptcy payment. However, any taxes assessed in the future will be your responsibility, and you should make a direct payment to the taxing entity. The same would apply to taxes due on a house or land if the taxes are not escrowed into your monthly mortgage payment.
You should speak with your attorney to clarify any questions regarding tax liens and tax payments on real or personal property.
Key Takeaways
- Property taxes are never dischargeable in bankruptcy — you owe them for as long as the asset remains legally in your name.
- In Chapter 7, if you surrender a house, unpaid property taxes are typically paid when the property is foreclosed on or transferred, so out-of-pocket payment is often not required.
- If you surrender a vehicle in Chapter 7, taxes continue accruing until the taxing authority is notified you no longer own it — contact your county to find out the correct procedure.
- In Chapter 13, property taxes owed as of your filing date are included in your monthly plan payment and paid through the trustee.
- Any property taxes that come due after your Chapter 13 filing date are your direct responsibility and must be paid outside the plan to avoid falling behind.
- Property tax liens on real estate take first-priority position — they can even outrank a first mortgage — which is why leaving them unpaid puts your property at serious risk.
Attorney Insight
The mistake I see most often is people assuming that surrendering a property in Chapter 7 wipes out any tax obligation along with it — it doesn't, at least not immediately. You remain the legal owner until the deed actually transfers, which means taxes keep accruing in your name until that happens. What usually saves people is that the lien rides with the property, so the taxes get settled at closing or foreclosure without requiring an out-of-pocket payment from you — but that's a byproduct of how liens work, not a discharge. Where this really bites people is with surrendered vehicles: I've had clients receive tax bills long after giving up a car because they never formally notified their county that the title had transferred.
