Bankruptcy and tax foreclosure
Homeowners can challenge a tax foreclosure fee in Michigan
The Sixth Circuit said Michigan’s tax-sale process gave the county more than Chapter 7 liquidation would have, because a 5% sales commission pushed the payout above bankruptcy law’s limit.
A federal appeals court said a Michigan county crossed a bankruptcy line when its tax-sale process added a 5% commission on top of what Chapter 7 would have paid. For homeowners, that fee can now be the difference in a preference fight.
- A Michigan county got more from the tax-sale process than Chapter 7 would have paid.
- The 5% commission was the key extra payment.
- That made the transfer preferential under bankruptcy law.
- The ruling could give some homeowners another way to challenge tax foreclosures.
- For Michigan homeowners facing tax foreclosure, the difference between keeping a house and losing it can turn on a surprisingly small sum
For Michigan homeowners facing tax foreclosure, the difference between keeping a house and losing it can turn on a surprisingly small sum. In the federal Sixth Circuit, judges said a county got more through Michigan’s tax-sale process than it would have received in a hypothetical Chapter 7 liquidation, and that made the transfer preferential under bankruptcy law.
The county would have been paid its claim in full plus interest in Chapter 7. But the tax-sale path also handed it a 5% sales commission. That extra payment was enough to push the county above the bankruptcy baseline.
Where the extra money came from
The court treated the case as a straight comparison of two outcomes. One path was hypothetical Chapter 7, where the county would collect the debt and interest. The other was the state tax-sale process, where the county collected that same amount and then took the commission too.
That 5% commission was the difference-maker. Without it, the county would have been no better off than in Chapter 7. With it, the county received more than bankruptcy would have allowed, which is why the transfer counted as preferential.
The ruling turns the preference test into a simple question: did the creditor end up ahead because of the transfer? Here, the answer was yes.
Why that matters for homeowners
The practical point is not just about one property. It is about how recently foreclosed homeowners can use bankruptcy to challenge a county’s take when the county benefits from an added fee that Chapter 7 would not have provided.
For county treasurers and bankruptcy lawyers, the message is equally plain. When the tax-sale process adds money on top of a fully paid claim, that extra amount can be enough to trigger a preference fight. For homeowners, that creates another possible way to attack a transfer that otherwise might look final.