Knowledgebase-Delinquent Property Taxes in Bankruptcy

Information Product

Title:Delinquent Property Taxes in Bankruptcy
Summary:MTAS was asked about collecting delinquent property taxes from taxpayers who are in bankruptcy.
Original Author:Ashburn, Melissa
Product Create Date:11/06/2006
Last Reviewed on::11/02/2009
Subject:Tax collection--Delinquent taxes; Taxes--Real property--Tennessee; Taxes--Real property; Bankruptcy
Type:Legal Opinion
Legal Opinion: Delinquent Property Taxes in Bankruptcy public.doc

Reference Documents:

Text of Document: November 6, 2006

Re: delinquent property taxes in bankruptcy

Dear City Recorder,

Your MTAS Management Consultant informs me that you have a question about collecting delinquent property taxes from taxpayers who are in bankruptcy. It is my understanding that your county Clerk and Master receives your delinquent property tax list, and has been refusing partial payments sent by the bankruptcy court.

Once a property owner declares bankruptcy, any action to collect delinquent taxes must be handled by the bankruptcy court only. If a lawsuit for collection was started in a lower court before it was learned that the defendant declared bankruptcy, the lower court action is automatically “stayed” pending outcome of the bankruptcy action.

Most delinquent tax attorneys check for names of taxpayers on the bankruptcy court docket before filing suit to collect taxes. Those that have declared bankruptcy are left out of the tax collection suit. The attorney, or municipal tax collector, obtains a form from the bankruptcy court clerk and completes the “proof of claim” form with information concerning each delinquent taxpayer and the amount of taxes owed. This proof of claim form is then filed with the bankruptcy court. The proof of claim form is used by the court to determine what bankruptcy plan to approve for the defendant, and payments for each claim submitted are set by the court. Pursuant to the court’s order and the plan approved, the court will then send partial payments to the address indicated on the proof of claim form, whether it be the Clerk and Master, tax attorney or municipal tax collector.

Partial payments must be accepted by any party who receives the funds, as bankruptcy court orders take precedence over any state court action. Even if the Clerk and Master or attorney has a policy of not accepting partial payments, such payments must be accepted from the bankruptcy court. If refused, the city may lose any right to collect the delinquent taxes owed. Once the bankruptcy is completed, any taxes that remain unpaid are essentially waived, and the city will not get another chance to go back and collect those amounts. All such debts are discharged by the bankruptcy court.

If your Clerk and Master refuses to accept partial payments from the bankruptcy court, the City should stop sending those delinquent taxes to the Clerk and Master for collection. A quick visit to the bankruptcy court, and a view of the court’s docket, will reveal whether any taxpayers have declared bankruptcy. Those taxpayers should not be included in the tax suit. The City may rather file the proof of claim forms for each such taxpayer, and proceed with taking payments sent by the court.

I hope this information is helpful.


Melissa A. Ashburn
Legal Consultant

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.