Whitesburg KY
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Pay now or pay much more later

$100 local property tax bill can quickly rise to $450 for delinquent payers

In 2008 about 13-percent of the property tax bills were delinquent in Letcher County. Bills that remain unpaid may be sold on the Letcher County Courthouse steps. In some cases these delinquent tax bills may be sold to individuals and companies in the county or to the government. However, they are often sold to individuals or companies from outside the county and in many cases outside the state.

The good news is that these purchasers pay the tax bill for the property owner. This payment provides the county and the state with needed tax revenue. The bad news — at least from the viewpoint of the owner who failed to pay his or her taxes — is that property owners now owe money to whoever purchased their delinquent property taxes. These property owners will have to pay additional fees and these additional fees can really accumulate.

The effect of failing to pay a tax bill can be significant; an unpaid tax bill of $100 could end up costing over $440 after just one year (even before any court action is taken). If someone does not pay these fees, the consequences could be severe. Some folks could even lose their land.

In the event that these delinquent bills are purchased by someone other than the property owner or the government, the county or state considers the delinquent bill to be settled. In other words the government leaves it up to the person who bought the delinquent tax bill to settle the issue with the delinquent taxpayer.

The purchaser of the delinquent tax bill has reason to be confident that they will eventually get their money. When they buy the delinquent tax bill they also get a lien on the property. The lien doesn’t go away until they get paid. This means that private purchasers can buy up several years’ worth of tax bills which would add upon each other.

After one year, if the person who bought the delinquent tax bill is not paid, they can choose to force a foreclosure on the property. In other words, if the bill cannot be paid, the delinquent tax payer may have to finance the debt payment by selling the property the lien is attached to. In some cases, the delinquent tax bill holder may become the new property owner.

The person who purchased the delinquent tax bill might not choose to force a foreclosure on the property after the first year. Indeed, by law, the person who purchased the delinquent tax bill may have up to 11 years after the original tax due date to force a foreclosure.

The question we now turn to is: How did the current situation, both legally and otherwise come to pass? By going back through the history of laws made by the Kentucky legislature it is possible to piece some of the story together.

Since 2003 at least 25 bills have been put forward by either the Kentucky House or the Senate that deal with delinquent tax bills. In one year, 2006, there were a total of seven bills considered. Some of these bills deal directly with the issue of delinquency while others had relevant amendments tacked on to them. Of these twenty-five bills only five were passed into law. These are House Bill (HB) 510 in 2004, HB 4 in 2005, HB 171 in 2006, HB 321 in 2007 and HB 262 in the most recent legislative session.

The first of these laws, HB 510, passed in 2004. As this bill moved through both houses of the Kentucky Legislature, various amendments were added. One amendment was adopted which allowed “other costs and reasonable attorney fees” to be charged by whoever purchased the delinquent property tax.

This bill may have been important in providing the financial incentives that would later cause an increased interest in the purchase of delinquent tax bills. Before the passage of this bill, the Kentucky Attorney General had ruled that a private purchaser could not recoup private attorney’s fees.

These private attorney fees can be substantial. For example, in the 2006 case of Ironwood Acceptance Company v. Walters, et al. the company who had purchased the delinquent tax bill sought attorney’s fees of $2035.52 on a tax claim of $3656.26.

The 2007 case of American Tax Funding v. Gene, et al., gives yet another example. In this case, the company had attempted to charge $5329.59 as private attorney’s fees on a tax claim of $1281.67. Because the version of Chapter 134 of the Kentucky Revised Statutes that existed at the time did not have a formal definition of “reasonable attorney’s fees” American Tax Funding claimed that their request was reasonable.

In 2005, HB 4 was passed. The changes in this bill were not as dramatic as those in HB 510 of the year before. This new bill dealt only with the county attorney fee that could arise from the state attempting to obtain payment of delinquent tax bills.

In 2006, HB 171 was passed. This bill allowed the publication of delinquency lists online and reduced the number of times that they had to be published in the newspaper. Of course, by placing these lists online they became visible to any potential purchasers, wherever they might be located.

In 2007, HB 321 was passed. According to a newsletter put out by the Kentucky Bar Association, the bill was passed as a result of a case entitled American Tax Funding v. Farris, et al. that had been going through the Franklin Circuit Court. In a later case, the Kentucky Court of Appeals ruled that American Tax Funding had asked for unreasonably large attorney’s fees.

According to a 2007 Local Mandate Fiscal Impact Assessment report that was published by the Kentucky state government about the bill, “The bill’s stated purpose is to curtail the charging of unconscionable attorney’s fees and costs from individuals paying certificates of delinquency.”

Part of the underlying problem was that the language of the Kentucky Revised Statutes in existence before the passage of HB 321 was vague when it came to the meaning of the “reasonable attorney’s fees” that were added in 2004. This led to some companies attempting to charge fees that were quite sizable when compared to the amount of the actual tax bill.

HB 321 contained various protections for the people whose tax bills had been bought up so that situations such as those described above would not happen again. To start, the bill defined what “reasonable attorney’s fees” meant. This was done by placing limits on the pre-collection attorney’s fees that could be charged based upon the cost of the delinquent bill.

An additional concern raised by the Assessment report was that “… some private purchasers have made it very difficult for taxpayers to make payments on certificates of delinquency by not providing sufficient contact information to taxpayers.” As a way to deal with this problem, the county clerk could be paid instead of the private purchaser if the private purchaser could not be located.

Additionally it included requirements that tax payers be sent more notices and contact information by any person or company purchasing their taxes.

HB 262, which will take effect as of January 2010, will effectively set the new rules governing delinquent taxes. There are a lot of rules that will now apply and we only discuss a few below:

(1) All property tax bills that are not paid off following three months and 15 days after the due date become certificates of delinquency, subject to county clerk and attorney fees, and may be sold after 90 days.

(2) The county clerk will now become responsible for what used to be the sheriff’s annual sale.

(3) The clerk’s 10% fee and the attorney’s 20% fee will be added to the bill before the day that the delinquent bill is sold.

(4) The county attorney is supposed to send out 2 letters to delinquent taxpayers prior to the delinquent sale. The letter notifies them that they are delinquent and advises them of their options.

(5) Delinquent taxpayers who want to pay off their bill, but cannot afford to, can set up a payment plan with the county attorney. If payments are being made, the delinquent bill cannot be sold to purchasers.

One reason we wrote this article is that there has been an increased interest in buying delinquent taxes in Letcher County over the past few years. We wanted to understand why and what it means.

Simply put, we think there are financial incentives to purchase delinquent property taxes. These financial incentives are, in part, the result of legal changes we discuss above.

Given the financial incentives, we expect that individuals and companies will continue to purchase delinquent property taxes. In some ways this will make it easier to collect taxes. The purchasers of delinquent property taxes pay the county and then they (not the county) collect from the property owner. On the other hand, we worry that some folks could end up paying some pretty big fines. And, in some cases they might face foreclosure.

No one knows the future for sure and so we can’t anticipate the extent to which foreclosures might occur. We also can’t anticipate future changes to the law. In addition we are not in a position to say whether these rules are good or bad. We do suspect, however, that these rules will result in winners and losers.

Brady Deaton is an Associate

Professor of Food, Agricultural and

Resource Economics at the University

of Guelph in Canada. He coordinated

the North Fork Clean Water

Project in Letcher County from

1995-1997 and worked closely with

community leaders to help form

the Letcher County Water and

Sewer District more than 10 years

ago. He continues to research issues

relevant to Letcher County.

Zachary Daly and Luke O’Neil

are Undergraduate Research Associates

at the University of Guelph.

They are both interested in economic

and legal issues.

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