What Happens If I Don't Pay Property Taxes in North Carolina?

If you're delinquent in paying your real property taxes in North Carolina, you might lose your home to tax foreclosure. Fortunately, you'll find out about the tax foreclosure sale before it happens, and you'll have the chance to get current on the delinquent amounts, plus interest and costs, to prevent the loss of your home.

Also, if you let the foreclosure go through to a sale, you'll get a short amount of time afterward to reclaim the property by "redeeming" it.

How Do Property Taxes Work?

People who own real property have to pay property taxes. The government uses the money that these taxes generate to pay for schools, public services, libraries, roads, parks, and the like. Typically, the tax amount is based on a property's assessed value.

If you have a mortgage on your home, the loan servicer might collect money from you as part of the monthly mortgage payment to later pay the property taxes. The servicer pays the taxes on the homeowner's behalf through an escrow account. But if the taxes aren't collected and paid through this kind of account, the homeowner must pay them directly.

When homeowners don't pay their property taxes, the overdue amount becomes a lien on the property. A lien is a claim against your property to ensure you'll pay the debt, effectively making the property collateral. All states have laws that allow the local government to sell a home through a tax sale process to collect delinquent taxes.

What Are the Consequences of Not Being Able to Pay Property Taxes in North Carolina?

Once a real property tax bill becomes delinquent in North Carolina, the tax collector may foreclose its tax lien. The foreclosure process either goes through the court (the procedures are similar to a judicial foreclosure of a mortgage) or through a process called "in rem."

Mortgage-Type Tax Foreclosures in North Carolina

With this kind of tax foreclosure, the tax collector files a lawsuit against you (the homeowner) in court. When the tax collector files the foreclosure action with the court, you'll receive a summons and a copy of the complaint (the lawsuit). (N.C. Gen. Stat. § 105-374).

If you don't respond to the suit and provide a valid defense, like you aren't actually behind in your taxes, or pay the delinquent amounts to get current, the court will enter a judgment and order your home to be sold at a public auction. The sale proceeds pay off the delinquent taxes, costs, and fees. (N.C. Gen. Stat. § 105-374).

After your home is sold to satisfy the tax debt, the sale remains open through an upset-bid period. (After the foreclosure sale, another buyer can come in and buy the home by making a higher bid than was bid at the sale. This kind of bid is called an "upset bid.") The upset-bid period initially lasts for ten days after the commissioner files a report of the foreclosure sale. (N.C. Gen. Stat. § 105-374).

If someone enters an upset bid during this time, the sale will stay open for another ten days. If someone enters a subsequent upset bid, another ten-day starts. Once ten days go by without an upset bid, the court will confirm the sale. Once the sale is confirmed, the purchaser gets a deed to the property after paying the purchase price. (N.C. Gen. Stat. § 105-374(p)).

In Rem Tax Foreclosures in North Carolina

Instead of filing a lawsuit, the tax collector can choose to use an alternative process called an "in rem" foreclosure. With an in rem foreclosure, the tax collector files a certificate with the court. This step is referred to as "docketing." (N.C. Gen. Stat. § 105-375). This step effectively creates a judgment against your home in the amount of the taxes, interest, and costs.

At least 30 days before docketing the judgment, the tax collector must send you a notice of the foreclosure by registered or certified mail, return receipt requested. If the tax collector does not receive a return receipt indicating that you got the notice within ten days, the collector must make reasonable efforts to locate and notify you by, for example:

• posting the notice on the property
• mailing a notice to the property address by first-class mail, and
• publishing it in a newspaper. (N.C. Gen. Stat. § 105-375).

At any time after three months after docketing, but no more than two years from the indexing of the judgment, the tax collector can file a request for execution with the court. The court then orders the sheriff to sell your home to satisfy the tax debt. (N.C. Gen. Stat. § 105-375).

The sheriff will then mail you a notice of sale by registered or certified mail, return receipt requested, 30 days before the sale date. If the sheriff doesn't receive a return receipt within ten days, the collector must take steps to notify you, like by posting notice at the courthouse and publishing the notice in a newspaper. (N.C. Gen. Stat. § 105-375).

Again, the bidding is held open for ten days after the sale for the filing of an upset bid. Each upset bid starts a new ten-day upset bid period.

Can I Get My Home Back After a North Carolina Tax Sale?

In many states, the homeowner can redeem the home after a tax sale by paying the buyer from the tax sale the amount paid (or by paying the taxes owed), plus interest, within a limited amount of time. Exactly how long the redemption period lasts varies from state to state. In other states, though, the redemption period happens before the sale.

Redeeming the Property After a Mortgage-Type Tax Foreclosure Sale in North Carolina

You may redeem the property—that is, pay off the delinquent taxes, plus various other amounts—before the court confirms the sale. (N.C. Gen. Stat. § 105-374).

To redeem, you must pay all delinquent taxes, taxes that are currently due, interest, penalties, and costs. (N.C. Gen. Stat. § 105-374).

Redeeming the Property After an In Rem Foreclosure in North Carolina

You can stop the foreclosure by paying off the debt before the upset-bid period ends. (N.C. Gen. Stat. § 1-339.57). North Carolina law says that payment in full of the judgment together with interest and costs cancels the judgment. (N.C. Gen. Stat. § 105-375).

Or, in rare circumstances, you might be able to get the court to set aside (invalidate) the judgment before the issuance of execution on the ground that the tax has been paid or that the tax lien on which the judgment is based is invalid. (N.C. Gen. Stat. § 105-375). If you want to ask the court to set aside the judgment, you'll most likely need a lawyer to help you file a motion with the court.

Does a Mortgage Survive a Tax Foreclosure in North Carolina?

If your loan isn't escrowed and you fail to pay the property taxes, your loan servicer will probably pay the delinquent amount and then bill you for them. But why is the servicer concerned about unpaid property taxes? Because a property tax lien has priority.

Property Tax Liens Get Priority

Property tax liens almost always have priority over other liens, including mortgage liens and deed of trust liens. (For purposes of this discussion, the terms "mortgage" and "deed of trust" are used interchangeably.)

Because a property tax lien has priority, mortgages get wiped out if you lose your home through a tax foreclosure process. So, the loan servicer will usually advance money to pay delinquent property taxes to prevent this from happening. Most mortgages have a clause allowing the lender to then add the amount it paid to your loan balance. You'll then have to make repayment arrangements with the servicer.

You Might Face a Foreclosure If You Don't Reimburse the Servicer

The terms of most mortgage contracts require the borrower to stay current on the property taxes. If you don't reimburse the servicer for the tax amount it paid, you'll be in default. The servicer can then foreclose on the home in the same manner as if you had fallen behind in monthly payments. The North Carolina foreclosure process takes a while, and you'll get notified before a foreclosure sale happens.

Your Servicer Might Set Up an Escrow Account

After demanding repayment of the amount it paid for the taxes, penalties, plus interest (and assuming you repay this tax debt), your servicer will probably set up an escrow account for the loan. Each month, you'll have to pay approximately one-twelfth of the estimated annual cost of property taxes—and perhaps other expenses, like insurance—along with your usual monthly payment of principal and interest. This money goes into the escrow account.

The loan servicer then pays the cost of the taxes and other escrow items on your behalf through the escrow account.

What Gives the Servicer the Right to Set Up an Escrow Account?

Many mortgages have a clause allowing the lender to establish an escrow account at basically any time. The servicer sets up and manages the account on behalf of the lender.

To find out if and when the lender can set up an escrow account for your loan, read your mortgage contract and any other relevant documentation you've signed, like an escrow waiver.

Mortgage Escrow Accounts: Pros and Cons

The downside to having an escrow account is that you'll have to make a bigger monthly payment to the servicer. On the positive side, having an escrow account saves you from having to come up with a large amount of money when tax bills, and perhaps other bills, are due.

What Options Do I Have If I Can't Afford to Pay My Property Taxes in North Carolina?

To avoid falling delinquent on property taxes in the first place, consider looking into different ways you could make your taxes more affordable. For instance, before you fall behind in your taxes, you might:

• meet the qualifications for a property tax abatement or
• be able to challenge the assessed value of your home (if you think it's incorrect) to reduce the amount of taxes you have to pay.

Getting Help

If you're facing a property tax foreclosure in North Carolina and have questions (or need help redeeming your property), consider talking to a foreclosure, tax, or real estate lawyer.