How to redeem property in chapter 13

You can keep your property in Chapter 13 bankruptcy, but you'll have to keep up with secured debt payments and catch up on secured debt arrears.

In Chapter 13 bankruptcy, you can keep all of your property. But that doesn't mean that you won't have to pay for some of it. You're allowed to protect, or "exempt," a certain amount of equity in the property you'll need to maintain a home and job. If you want to keep nonexempt property, such as a boat, baseball card collection, or another luxury item, you'll have to pay for it through your Chapter 13 plan.

Also, if you want to keep a home, car, or some other property that you're still paying on, and you put up the property as collateral (agreed that the creditor could take it back if you failed to make your payment), you must continue to make the payments and be able to pay back any arrearages over time.

Read on to learn more about how to keep your property in Chapter 13 bankruptcy.

Why Keeping Property in Chapter 13 Might Cost You

No one will sell any of your property in Chapter 13 bankruptcy. But that doesn't mean that you get something for nothing. Here are the rules.

If all of your property is exempt, you'll get to keep it without penalty. However, if it's nonexempt, you'll have to pay for it. So how do you know whether you have exempt or nonexempt property?

Your state decides the property that you'll need for a fresh start in bankruptcy (some states allow you to choose between state exemptions and federal exemptions). You'll get to keep exempt property without cost, no matter which bankruptcy type you file.

However, what happens to your nonexempt property—the property not covered by an exemption—will depend on the bankruptcy chapter.

• Chapter 7 bankruptcy. The Chapter 7 trustee liquidates (sells) your nonexempt property and uses the proceeds to pay your unsecured debts.
• Chapter 13 bankruptcy. The Chapter 13 bankruptcy trustee doesn't sell your nonexempt property. Instead, you'll pay for the value of any nonexempt property to your unsecured creditors through your repayment plan.

(Learn more in Bankruptcy Exemptions.)

Nonexempt Property Can Increase Your Chapter 13 Plan Payment

In your Chapter 13 plan, you're required to pay off certain debts in full. These include mortgage arrears and priority debts such as certain taxes. However, the amount you pay your general unsecured creditors (such as credit card companies) depends on your income, expenses, and nonexempt property. Specifically, you're required to pay all of your disposable income—the amount that remains after deducting allowed living expenses.

However, there's more. If you have nonexempt assets, you're required to pay either your disposable income or an amount equal to the value of your nonexempt assets—whichever amount is higher. So, while you get to keep your nonexempt assets, potentially you might have to pay a higher dividend to unsecured creditors through your repayment plan.

In fact, having a lot of nonexempt assets might preclude you from filing for Chapter 13 bankruptcy if your income isn't sufficient to meet the required payment. (To learn more, see The Chapter 13 Repayment Plan.)

You Must Stay Current on Loan Payments to Keep a Home, Car, or Other Collateral

If you wish to keep property that you've pledged as collateral for a loan—such as your house or car—you must continue making the payments during your Chapter 13. Otherwise, your mortgage or vehicle lender can ask the court to lift the automatic stay—the order that stops your creditors from collecting against you—and if successful, initiate or resume foreclosure or repossession.

Whether or not you can pay your monthly mortgage or car payment outside of your plan will depend on your court. For instance, some require you to pay through the plan if you're behind on payments when you file. Why does it matter? Because you must pay the bankruptcy trustee a percentage of all amounts paid through the plan, thereby potentially increasing your costs significantly.

You Can Catch Up on Loan Payments in Your Repayment Plan

One of the benefits of Chapter 13 bankruptcy that isn't available in a Chapter 7 case is that you can catch up on secured debt payments. Chapter 13 bankruptcy lets you avoid foreclosure or repossession by allowing you to spread out missed payments over the course of your three- to five-year repayment plan. While you cure your default, the automatic stay prohibits creditors from foreclosing on or repossessing your property. When you finish your plan, you'll be caught up on your payments.

(To learn more, see Secured Debts in Chapter 13 Bankruptcy.)

The question of what happens when a debtor files a Chapter 13 bankruptcy petition as a means of redeeming sold real estate taxes1 is being addressed throughout the country with more regularity. Recently, bankruptcy courts in Illinois and Georgia have provided some insight into how this question should be answered. In In re Robinson,2 the real estate taxes had been properly sold to a tax purchaser and the period for the debtor to redeem the taxes had expired prior to the filing of the Chapter 13 petition. The tax purchaser sought relief from the automatic stay in order to obtain a tax deed through the statutory process. The court analyzed a Seventh Circuit decision from 20103 holding that “the meaningful transfer [of the property] did not occur at the close of the redemption period, but rather when the tax deed was recorded”, and another from 20144 which found that a debtor retains title to a property prior to the issuance and recording of a tax deed, and further that a debtor’s treatment of a tax purchaser’s claim under a Chapter 13 plan is not a formal “redemption” of the property, but rather the treatment of a secured claim. In concluding that Seventh Circuit precedent makes clear that a debtor’s rights with respect to real property are not substantively affected by the running of the redemption period, the court held that the debtor was entitled to treat those taxes under her Chapter 13 plan because a tax deed had neither been issued nor recorded, and as such, the tax purchaser’s motion for relief from automatic stay was denied.5

In In re Woodley,6 the tax purchaser was the highest bidder at a tax sale of the debtor’s property and took title via tax deed, subject to the 12-month redemption period provided by Georgia law.7 The debtor filed her Chapter 13 bankruptcy case prior to the expiration of the redemption period. As in Robinson, at issue in Woodley was the debtor’s proposal to pay the redemption price through her Chapter 13 plan. The tax purchaser objected, contending that it became the owner of the property after the tax sale, with the debtor retaining only a right to redeem the property. As such, the tax purchaser argued, only the right to redeem — not the property itself — should enter the debtor’s bankruptcy estate, otherwise the plan would be allowing for an impermissible repurchase of the property. The court observed that the issue of whether a Chapter 13 debtor can redeem real property sold in a tax sale through a Chapter 13 plan has created a split in the district and across the country. The court summarized the two divergent views in the Northern District of Georgia as follows: a debtor cannot redeem property sold in a tax sale through a Chapter 13 plan because only the redemption right, not the property itself, enters the bankruptcy estate vs. a Chapter 13 debtor may redeem the property through a plan because the real property itself has entered the bankruptcy estate, and the tax purchaser merely holds a “claim” subject to modification in a Chapter 13 plan. In finding the latter position more persuasive, the court analogized tax deeds to security transfer deeds, stating that neither of those instruments “transfer the bundle of rights that comprise what is typically understood as property ownership — the rights of possession, use, profits, exclusion of others.” In either instance, the title obtained is less than full and “can be defeated” by the redemption right of the property owner, who remains the titled owner to the property until the tax deed has been recorded and the redemption period has elapsed. As such, the court in Woodley held that the property was part of the bankruptcy estate because the debtor’s redemption rights never terminated.8 The court also found that, due to the tax purchaser’s entitlement to payment of the redemption price or to foreclose on the debtor’s redemption right and acquire the debtor’s interest in the property, the tax purchaser held a secured claim that could be paid through the debtor’s Chapter 13 plan.

Robinson and Woodley thus demonstrate that, depending on state law, bankruptcy courts may consider real property, the delinquent real estate taxes of which have been purchased by a third-party, to be a part of a debtor’s bankruptcy estate as long as title to the property has not transferred to the tax purchaser prior to the filing of the debtor’s bankruptcy case. The expiration of the redemption period, at least in Illinois and Georgia, is no longer a bar preventing a debtor from redeeming sold real property taxes through its Chapter 13 plan. 

1. Many jurisdictions in the U.S. have enacted statutory schemes to monetize the right to payment of delinquent real estate taxes through “tax sales.” While specific procedures vary by county and state, such tax sales typically involve third-parties engaging in competitive bidding at an annual public tax sale auction to purchase the right to payment of the real estate taxes, together with statutory interest. Generally, following the sale, if the landowner, or other interested party such as the mortgagee, does not pay the amount of the delinquent taxes within the redemption period specified by law, together with statutory interest, the tax purchaser can seek to obtain a tax deed to the property in order to acquire title. Redemption periods differ by state. In Illinois, for instance, the period of redemption is two years and six months from the date of the tax sale, and the tax purchaser has the option of extending the redemption period for up to three years from the date of sale, while in Georgia, the record property owner, mortgagee or outstanding security deed holder has 12 months from the date of sale to redeem the property. See 25 ILCS 200/21-350(b); Code Ann.
   § 48-4-45.
2. Case No. 17 bk 12405 (Bank. N.D. Ill. Dec. 4, 2017).
3. In re Smith, 614 F.3d 654 (7th Cir. 2010).
4. In re LaMont, 740 F.3d 397 (7th Cir. 2014).
5. In so holding, the court declined to follow In re Bates, 270 B.R. 455 (Bankr. N.D. Ill. 2001), which held that a debtor’s ability to treat a tax purchaser’s claim in bankruptcy depended on whether the redemption period had expired prior to the commencement of the case, rather than whether a tax deed had been issued and recorded.
6. Case No. 17 bk 53630 (Bank. N.D. Ga. Dec. 18, 2017).
7. Under Georgia law, upon payment of the redemption price, the tax purchaser is required to make a quitclaim deed to the property owner, which would have the effect of transferring the title conveyed by the tax sale back to the owner, subject to all liens existing at the time of the tax sale. Code Ann. §§ 48-4-44; 48-4-45.
8. Pursuant to Georgia state law, the tax purchaser was entitled to record a tax deed immediately following the tax sale, subject to the debtor’s redemption rights. Illinois law requires a tax purchaser to obtain a tax deed through a formal court proceeding, and in Robinson, despite the debtor’s redemption rights being expired, the tax purchaser had not yet been granted the right to record a tax deed prior to the debtor’s bankruptcy filing.  

This article was originally published by Chapman and Cutler LLP on January 23, 2018, and was republished by Pratt's Journal of Bankruptcy Law in its April/May 2018 issue. The republished article is posted with permission.

The article was also republished by LexisNexis Emerging Issues Analysis in May 2018. 

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