What Affect Does a Bankruptcy Filing Have Upon an Illinois Real Estate Tax Sale?

The date a bankruptcy case is filed determines a lot.  The filing of the bankruptcy case triggers the implementation of the “automatic stay” provisions of the U.S. Bankruptcy Code.  11 U.S.C. §362(a).  The stay enjoins creditors from taking action to collect debts owed by the debtor.

But how does the automatic stay affect the sale of real estate taxes in Illinois?  The real estate tax sale is actually a multi-step process.  So, the effect of bankruptcy filing depends on the status of the tax sale and whether the buyer is aware of the bankruptcy filing.

An Illinois real estate tax sale has three parts and the bankruptcy case can be filed before or after these parts.  The first part is the tax sale by the county taxing authority and the purchase by a tax buyer.  The buyer tenders money to the taxing authority.  A bankruptcy filing prior to the sale blocks the county from selling the taxes.  Any sale in violation of the automatic stay would be void.

The second part relates to the redemption period assuming the taxes were sold prior to any bankruptcy case.  A bankruptcy filing during the redemption period would not void the sale. However, a bankruptcy filing could effectively extend the redemption period if the homeowner establishes a repayment plan, like a Chapter 13 repayment plan.  The bankruptcy filing does not actually “extend” the redemption period, but it has the same effect.  The redemption period would not expire and the tax buyer would not be allowed to petition the circuit court for a tax deed during a chapter 13 repayment plan if that plan provides for the repayment of the sold taxes.

The third part of the tax sale relates to the petition of the circuit court for the issuance of a tax deed.  A bankruptcy filing after the issuance of the tax deed would not affect the homeowner’s rights because the homeowner would have already lost all legal rights to the property prior to the bankruptcy filing.  In general, a bankruptcy filing stops future action against the bankruptcy filer and preserves the status quo; a bankruptcy filing does not reverse a tax sale or the issuance of a tax deed.

But the bankruptcy court in In re Wilson, 536 B.R. 218 (Bankr. N.D.IL 2015)(Black, J.) had to decide what impact a bankruptcy filing had upon the issuance of a tax deed by an Illinois circuit court when the issuance occurred AFTER a bankruptcy filing but WITHOUT the tax buyer knowing a bankruptcy case was filed.  There, the tax buyer was never informed of the bankruptcy case until after the circuit court had issued the deed.  Both the debtor and the mortgage lender knew of the bankruptcy filing; neither notified the tax buyer.  Consequently, the tax buyer never filed a motion to “lift or remove” the automatic stay prior to petition the circuit court for the tax deed— a motion that the court would have certainly granted.

The Wilson tax buyer filed a motion to “annul” the automatic stay pursuant to 11 U.S.C. §362(d) after the buyer discovered the bankruptcy filing.  The buyer stated that the buyer had no knowledge of the bankruptcy filing prior to the tax deed issuance despite taking steps to investigate.  The court noted that it would be inequitable to punish the tax buyer who acted in good faith while helping the mortgage lender who failed repeatedly to notify the buyer of the bankruptcy filing.  The Wilson court conducted an exhaustive study of the equities between the parties before granting the tax buyer’s motion to annul the automatic stay.  The court also noted that the battle was between the tax buyer and the mortgage lender with the homeowner taking no position.

Practice Pointer:   People who file bankruptcy should make efforts to notify ALL creditors and people who hold adverse interests in any property of the bankruptcy filer.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.

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