Beware of Tax Loan Services (For Property Taxes) in Texas

24 Oct Beware of Tax Loan Services (For Property Taxes) in Texas

The Texas Tax Code now allows Texans who own real property in Texas to take out a loan with a third party to pay past due property taxes. However, these loans come at an otherwise unnecessary and exorbitant cost to the borrower (property owner). If a borrower, whose real property is mortgaged, decides to pay past due taxes through a third party loan, the third party entity steps into the taxing authority’s shoes. his third party is entitled to charge interest in excess of the taxing authority from whom the tax lien was purchased. Currently, the taxing authorities may charge 12% interest but the third party entities are allowed to charge up to 18% interest. Additionally, the third party entity (the lien transferee) has the ability to foreclose on the property in the event that the borrower defaults under the terms of the loan. If the mortgage lender/servicer does not satisfy the tax transfer lien prior to the foreclosure sale, the mortgage lender/servicer may redeem the property post-foreclosure – but at a higher price. The Texas Tax Code allows the tax transferee to charge the mortgage lender/servicer a 25% premium for redemption of the property.

Effective September 2, 2007, Section 32.06 of the Texas Tax Code was amended to provide additional protections for consumers, including a bifurcated foreclosure process, additional notice provisions, and licensing requirements for the tax loan lenders.

As a bankruptcy attorney, it would be prudent to see if the mortgage lender would pay off the tax lien prior to the debtor filing bankruptcy. For instance, if the debtor owes $10,000 in past due property taxes to Harris County and then files bankruptcy, the taxes would be included in the Chapter 13 Plan at 12% interest. However, if the mortgage lender pays the taxes prior to the bankruptcy case being filed, the tax debt is now part of the pre-petition escrow shortage and must be provided for in the plan at 0% interest. If, on the otherhand, the debtor takes out a tax loan from XYZ Tax Loan Service the interest rate will be up to 18% if the underlying contract provides for such a high interest rate.  (See In re Davis, 352 R.R. 651 (Bankr.N.D. Tex. 2006).

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
  • Matt Longhofer
    Posted at 13:14h, 30 April

    While this article does bring up some valid points, the market dynamics of property tax lending have changed since this publication. First, the majority of tax lenders do not charge 18%. In fact many lenders quote significantly lower than 18%. Second, tax lenders will normally not make a loan to a borrower that is in bankruptcy.

    While the article suggests the advantages of having the 1st lender pay the property taxes, this can result in a forced escrow account. The “catch up” funding of this escrow account can sometimes be 2 to 3 times the normal mortgage payment. I would exercise caution when establishing an escrow account for delinquent taxes and be sure to fully understand how the mortgage lender will require funding of that account.

    While a third part property tax loan may not be the best solution for a property owner in bankruptcy, property tax loans do represent an excellent option for homeowners looking to avoid the penalties and interest charged by the tax assessor, which can be up to 44% in the first year of delinquency.