If you fail to pay your taxes, (whether local, state or federal) a tax lien will automatically be filed against your property. If you still can’t pay what you owe, then your house will inevitably be sold at a tax sale for the amount of back taxes, and any fees or fines that you owe the government.
Sometimes, the amount you owe the government is far less than what the property sells for at auction. What happens to the overage from the sale?
When a tax sale generates more money than is needed to pay off the tax lien, this overage of funds is referred to as “excess funds” or “surplus funds.”
When there are excess funds from a tax sale after paying all taxes, costs and expenses of the sale, the Tax Commissioner or Tax Collector will distribute the excess funds to whoever is entitled to them. Generally, this means the owner of record at the time of the tax sale, or the owner of record of a security deed affecting the property at the time of the sale, or someone with a recorded equity interest or claim at the time of the tax sale.
But what happens if there is more than one person with a valid claim to the funds?
Typically, if there is more than one person with a claim to the surplus or excess funds, and the Tax Commissioner or Tax Collector can determine which claimant is entitled to the funds, then the excess funds will be distributed to that person or entity.
But it is frequently very difficult to determine which claimant has a superior right to the excess funds. So, in many cases, when the priority of claims cannot be determined, the Tax Commissioner or Tax Collector will file an interpleader action.
An interpleader is an equitable proceeding. When there is a dispute as to money or property that cannot be decided (as when there are escrow funds in dispute or in our example here, excess funds from a tax sale), the neutral party holding those funds (i.e., the Tax Commissioner) can file an interpleader action to bring all the claimants into court to have the court decide who is entitled to the funds.
Although it may look like a typical litigation, an interpleader is not an adversarial proceeding. If you are served with a complaint in interpleader, you have not been sued. The person holding the funds will deposit them with the court and once all claimants to the money have appeared, will ask the court to decide who gets the money. An interpleader allows all claimants to the money (in this case the excess funds) to come into court and to present their claim to the judge. The judge will then decide the validity and priority of each claim. In other words, the judge will decide how much of the funds each claimant is entitled to.
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If you are facing tax sale foreclosure or have questions
about excess funds from a sale, contact us. We are experienced real estate
attorneys. We handle all aspects of real estate. To schedule your free phone consultation, call us at: 770-888-7707.