Help! I Can't Pay My Taxes

No matter how hard they try or how well they budget, some taxpayers find that they just cannot come up with the money to pay taxes before the February 1 delinquency date. And then with the assessment of interest and penalties by taxing units, future payment becomes even more difficult. Eventually, the taxpayer risks losing his property as the required payment climbs further and further beyond his financial reach.

But all may not be lost. There are several options that a taxpayer might consider in attempting to reduce the high cost of delinquent taxes.

Elderly/Disability Deferral

The Texas Property Tax Code provides that a person who qualifies property as their homestead and receives the elderly or disability homestead exemption can defer the payment of his or her taxes. The deferral is accomplished by filing an affidavit with the chief appraiser of the county appraisal district, stating the facts of qualification.

Previously, the deferral only applied to delinquent taxes and could be used to stop a collection lawsuit or tax foreclosure. However, during the last legislative session, the law was changed to allow a deferral prior to delinquency.

It is important to note that the deferral does not make the taxes go away; it merely delays their collection while the qualifying taxpayer occupies the property as his or her homestead. The taxes do incur interest at the rate of eight percent per year until eventually paid.

The deferral ends when the qualifying taxpayer no longer occupies the residence (i.e., when they die or move). However, a taxpayer's surviving spouse, who is at least 55 years of age and also occupied the property as their homestead, may continue to receive the deferral.

Any taxpayer choosing to take advantage of the deferral should do so prior to February 1, as the statute provides that penalty and interest incurred prior to the filing of the affidavit remain in place.

Elderly/Disability Installments

Homeowners aged 65 or older may pay current taxes on their homestead in four installments. To qualify for installment payment, the homeowner must pay at least one-fourth of the taxes before the February 1 delinquency date and must indicate on the first installment payment that the homeowner is paying the home taxes in installments. The installment payment plan then applies to all taxing units on that tax bill.

The three remaining installment payments are due before April 1, June 1, and August 1. Thus, the last day for timely installment payments would be March 31, May 31, and July 31. No interest or penalty applies to the payments, so long as the installments are made timely and in sufficient amount (at least one-fourth of the tax payment each).

If the homeowner misses an installment payment, the tax collector adds to the missed installment amount a penalty of 12 percent and also interest at l percent for each month of delinquency.

A homeowner may pay more than the amount due for each installment. Any excess payment on an installment is credited to the next pending installment. However, a person may not pay less than the total amount due for each installment unless the tax assessor-collector provides for accepting partial payments. If the collector accepts a partial payment, penalty and interest charges will be incurred on the unpaid amount due on the applicable date.

Homeowners receiving the disability homestead exemption and persons whose homes are located in a disaster area and damaged in a disaster may also qualify to make homestead tax payments in quarterly installments.

Installments for Everyone Else

The Tax Code allows a tax collector to enter into an installment agreement for the payment of delinquent taxes. However, the key language is that the taxes are delinquent. This means that the taxpayer probably would have to let the taxes become delinquent (and thus incur some penalty and interest) before entering into such an agreement.

Additionally, the taxes continue to accrue interest and late penalties during the period of repayment. However, if the taxpayer makes all installment payments, he or she might avoid the collection penalties of as much as 20 percent. The installment period can be for as long as 36 months.

The primary advantage of such installment agreements is to prevent foreclosure of the property for delinquent taxes. This installment plan is normally used by property owners who have high delinquent tax amounts who need time in order to pay off all of the accrued taxes. Business property owners suffering through lean economic times are the most likely taxpayers to use this type of plan.

Partial Payments

A tax collector normally is not required to accept a partial payment of taxes. However, the Tax Code does allow a tax collector to adopt a policy of accepting partial payments. A taxpayer who is able to pay part, but not all, of his or her tax assessment should check with the tax collector's office to see if such a policy has been adopted.

If partial payments are accepted, then the taxpayer can avoid the accrual of interest and penalties on the partial payment made. However, the unpaid portion will incur interest and penalty at the normal delinquency rates.

If the tax collector does not accept partial payments, then the taxpayer might see if they can validly file a protest with the appraisal district regarding the value of his property. During the pendency of a protest, whether administrative or judicial, the taxpayer is only obligated to pay the portion of taxes that is not in dispute. Thus, if the taxpayer's property is appraised at $150,000, but he can validly file a protest claiming that the property is worth only $100,000, then he would only have to pay taxes on the $100,000 value. The partial payment must still be made prior to February 1.

Also, if there is no value correction or if the eventual value correction is not as much as the taxpayer anticipated, then any unpaid taxes calculated on the correct value would incur interest and penalty charges.

Mortgage Company

If the property is subject to a mortgage, then it might be possible to obtain a supplemental loan or increased principal amount from the mortgage company.

Mortgage companies normally hold the first lien on a piece of property. However, if property taxes become delinquent, then the tax lien takes the first lien position and pushes the mortgage company to a subordinate position.

Thus, a mortgage company would have a vested interest in seeing that the taxes are timely paid, in order to secure its lien position. Therefore, a mortgage company might be willing to pay the taxes and add the amount to the existing mortgage.

However, any taxpayer considering this needs to have a very good relationship with his mortgage company. Failure to pay the taxes may be an event of default on the mortgage. Thus, the mortgage company may indeed pay the taxes. And then initiate foreclosure proceedings.

Credit Card

Some tax collectors will accept tax payments be credit card. Another possibility is the checks provided by credit card companies.

While such is certainly not a preferrable means of paying taxes, the interest charged by the credit card company may be significantly lower than the effective interest and penalties charged by the government for delinquent taxes.

Personal Loans

A taxpayer might also be able to obtain a personal loan from a bank, a friend, or a relative. Again, while this may not be a preferred manner of obtaining the funds to pay taxes, the interest rate on such loans are likely to be less than the combined interest and penalties charged by the government.

As an extra incentive to a friend or relative, the taxpayer could also execute a transfer of the tax lien. Through this method, the taxpayer authorizes someone else to pay his taxes who then steps into the shoes of the taxing unit as far as the priority lien provided to the government.

The person paying the taxes is allowed to charge interest up to 18 percent per year and obtains security for payment by having an enforceable lien on the taxpayer's property.

Tax Lien Financing Companies

As a last resort, a taxpayer may seek out a tax lien financing company. These companies make their money by loaning money to property owners to pay their taxes and then taking a lien on the owner's property through a transfer of the tax lien.

However, seldom are such financial arrangements of any benefit to the taxpayer and, thus, should only be used as an absolutely last resort to avoid foreclosure and loss of the property.

The law allows such finance companies to charge up to 18 percent interest. This 18 percent is not just charged on the taxes, but on the taxes, interest and penalties paid by the company. So, if the taxpayer has already incurred several percentage points in interest and penalty, the finance company will charge 18 percent on that interest and penalty.

Additionally, finance companies typically add several hundred dollars in fees to the transaction. Such fees are purportedly for expenses incurred in preparing the tax lien transfer affidavit, filing the lien, and preparing other documents relating to the loan. Then, if the taxpayer defaults on the tax lien loan, several hundred dollars more in expenses might be added for collection and foreclosure costs.

In the long run, the taxpayer might end up paying significantly more than he would have if he had just allowed the taxes to become delinquent and attempted to work out a payment plan with the tax collector.

Or worse, the taxpayer might lose his property to foreclosure by the tax lien finance company for a fraction of the property's value.

If you have any questions about the contents of this article, please contact Dan Donovan, David Kaplan, or Ron Gray or contact the GPD Property Tax Section at propertytax@gpd.com.