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Losing A Home Over A Trivial Debt

It sounds like a cautionary tale too outlandish not to be exaggeration: Miss a property tax payment of a few hundred dollars, and lose your home and all the equity you have accumulated by owning it.

For some residents of Washington D.C., however, the scenario is painfully real.

Last week, following a 10-month investigation, The Washington Post published three stories about egregious local tax practices that are putting some of the capital’s most vulnerable residents out on the streets. The first described how D.C. homeowners with liens on their property faced foreclosure after private companies bought the liens and inflated the amount owed with exorbitant fees, expense charges and interest rates. One in three of the homeowners who have lost their properties in recent years originally owed less than $1,000, the newspaper reported.

Washington residents are not alone in struggling with the effects of tax lien auctions. Three of the six companies who dominated D.C. auctions were owned by Steven Berman, who was previously caught rigging bids at tax lien auctions across Maryland. A report by the National Consumer Law Center last summer cited similar cases of elderly or ill homeowners losing their homes this way in other states, including Montana and Rhode Island.

Though senior citizens are not the only homeowners who have faced foreclosure due to lien sales, they represent a particularly vulnerable population. One reason is that they are more likely to have paid off their mortgages and own their homes outright. Properties with mortgages rarely get to the point where property taxes put them in danger of foreclosure, because banks receive copies of the property tax bills and usually pay the taxes through an escrow account. This protects the lender’s collateral.

The other reason elderly homeowners are most vulnerable to tax lien foreclosures is because this population has a higher instance of dementia and other health problems that can leave the homeowner without the capacity to manage financial affairs and protect their own interests. Those who still have all their faculties may be fighting physical ailments or tending to infirm spouses or relatives.

Young and old property owners alike in Washington were also at risk of falling victim to the local government’s own clerical errors. The Post found that one in every five liens was been sold by mistake in D.C. Even when the liens were not applied in error, the foreclosures that resulted hit the District’s poorest neighborhoods with disproportionate force, penalizing those without the resources to fight aggressive tactics by lien purchasers.

I can’t think of another scenario where a creditor can keep the entire proceeds of an asset’s sale, instead of just satisfying the outstanding debt. In most places, a bank that forecloses on a defaulted mortgage and sells the property keeps only the unpaid mortgage balance along with accrued costs. The idea of a $150,000 home being sold to satisfy a $500 tax debt, with the excess all staying with the party who paid the $500 owned to the city, ought to fall under the legal principle of “unjust enrichment.” Under basic principles of law, you don’t get something for nothing - every contract requires “consideration.” Ordinarily, you don’t get something of great value for next to nothing, either.

The government in D.C., however, has been content to turn a blind eye as long as it got its taxes paid. After the Post series appeared, Mayor Vincent Gray said that he, along with a D.C. Council member, would pursue emergency reform legislation.

Yet David Umansky, a spokesman for the Office of the Chief Financial Officer, says the office has no intention of stopping the practice due to the mayor’s call for a moratorium. “It’s up to the mayor and the Council to draft and pass legislation,” he said. Umansky also criticized the Post for focusing on cases that predated the tax office’s decision to stop auctioning the smallest delinquencies. The Post, in turn, observed that finance officials acknowledged this decision was designed to keep the volume of tax liens manageable, rather than to protect homeowners from losing their property.

If state and local governments don’t provide basic consumer protections in their property tax systems, Congress ought to expand federal laws governing debt-collection practices to stop the worst abuses. The federal government may not have the standing to tell states how to collect their own debts, but it certainly has the right to regulate the interstate commerce involved in selling liens to companies like those mentioned in the Post story, which often operate across state lines.

In the meantime, to protect their loved ones, families should make sure that copies of tax notices and important communications go to someone equipped to deal with them, rather than an ill or elderly person who lacks capacity to handle such matters. It is common for an adult child or a sibling to step in and request copies of utility bills, and there is no reason not to do the same with property taxes. This can keep vulnerable homeowners out of debt in the first place, and will help nip any problems in the bud.

You would think local tax departments would act with discretion and humanity toward their frailest citizens. In most places I imagine they do, and I honestly don’t know how the rest go to sleep at night. Losing a home over a trivial debt sounds too outrageous to be true. The outrageous thing is that it actually happens.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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