Property tax debt sale reform will allow homeowners to keep more of their equity

Illinois could soon reform the state’s regulations on delinquent property tax sales after the House approved a bill 80-35 along party lines Saturday evening that lets homeowners keep their equity.

House Bill 4537 makes various changes to the regulations for selling property tax debt. The key change is if a homeowner fails to pay their debt in an initial redemption period, and their property is seized and sold, they will receive any surplus funds left over from the auction.

That change will bring Illinois — the last state to do so — into compliance with the 2023 Supreme Court decision Tyler v. Hennepin County. Previously passed by the Senate, the bill will now head to the governor.

In Tyler, the court decided that the sale process violated citizens’ right to fair compensation for government seizure of property and ruled any surplus funds from the property sale must be returned to the owner to reimburse the equity they had in the property.

The new regulations would give certain counties the chance to purchase those debts themselves and offer more opportunity for the homeowners to pay back their debt.

The Senate passed the bill 56-1-1 on Thursday. Sen. Chapin Rose, R-Mahomet, voted no, and Sen. Willie Preston, D-Chicago, voted present, out of concern that the changes won’t work.

“We have done what we could to try to address as many concerns as possible, to try to address as much as we could, to try to ensure that people who are unfortunately in a position of losing their homes because of delinquent property taxes, have an ability to recoup some of the surplus once those properties are sold,” said the bill’s sponsor, Sen. Celina Villanueva, D-Chicago.

Process reforms

When an owner falls behind on property taxes, the county clerk can place a lien — a legal claim against a person’s assets to ensure their debt is paid — on the property. These liens can be sold as tax certificates in annual sales, often to third parties who hike interest rates and charge steep fees.

The property owners are given a redemption period at this point to pay off the debt, during which buyers must meet specific deadlines notifying the owner of the process steps. If the homeowner still can’t pay the debt, then the tax buyers can seize and resell the property.

In that way, tax buyers can obtain a property for just the cost of the debt, regardless of the property’s market value or equity the homeowner had invested.

Villanueva’s bill addresses the issue by both restructuring the way counties handle tax debt sales and giving homeowners the right to be reimbursed for their equity.

“That was always my north star in this, is how do I protect people, how do I help people,” Villanueva said. “It’s always been them.”

Counties with more than three million residents — effectively just Cook County — can take part in a pilot program during the next six annual sales by obtaining up to 100 tax certificates on certain low-tax, homestead properties. They would need to submit an annual report to the General Assembly detailing how many certificates the county acquired, what happened to them and where the proceeds went between the taxing district and the property owner.

That report will inform lawmakers if the new process works or whether a trailer bill is needed, House sponsor Rep. Curtis Tarver, D-Chicago, said on the floor Saturday night. Following the next six sales, those counties would be required to adopt the process.

“Cook County initially wanted the ability to take all tax certificates. … The pushback was to allow them to have a pilot program,” Tarver said. “Then (they) would report back to the General Assembly annually, and this will allow us to have an opportunity to see if that pilot program is in fact working, and if they have the ability to really scale up to take on all of the tax certificates.”

Some lawmakers pushed back on this model, however: “In six years, Cook County’s going to do something completely different than the other 101 counties in Illinois, and I just don’t think that that makes sense,” Rose told Capitol News Illinois on Friday.

Outstanding certificates

In February, Villanueva sponsored a bill that extended Cook County’s scheduled property tax sale to buy time while lawmakers negotiated this bill. Cook County was the focus in many of those negotiations, in part because it has significantly more outstanding certificates than any other county.

Lawmakers approved a similar bill in April, House Bill 799, but that bill only fixed the process moving forward, leaving those outstanding certificates in limbo. Then on May 11, a federal judge ruled the Cook County Treasurer’s office is liable to refund the money property owners lost in the tax sales between the Tyler decision and now.

This bill modifies the sales-in-error regulations to create a new category for any current outstanding certificates to be automatically declared in error, meaning those sales will be reversed, tax buyers will be refunded and the process will restart under the new statute.

There are also provisions extending the initial tax redemption period by six months to a total of three years and establishing a surplus equity fund for those who’ve lost their home in the past two years. That fund would be supplied by a set of fees charged to the tax buyers.

Buyers in counties of more than three million residents, essentially Cook County, must pay 5% of the total taxes, interest and penalties for a certificate, capped at $1,000, plus an additional 5% of the taxes, interest and penalties. Buyers in smaller counties must pay a flat $20 fee. When the certificate is issued, buyers in counties larger than three million residents must pay $1,000 and those in smaller must pay $500.

Some Republicans, including Rose, cast doubt on how effective the bill would be because of those fees.

“If the tax buyer doesn’t get repaid their money, who’s going to ever buy taxes?” Rose said.

The Illinois Tax Purchasers Association is opposed to the bill, out of concern that the surplus equity fund fees will impact their business model and drive tax purchasers out of the state, Rep. Steven Reick, R-Woodstock, said on the floor Saturday.

“I understand the concern of pushing, you know, the tax buyers completely out. Somebody’s got to pay the taxes, right?” Tarver said. “That’s why we understand that the purpose of the pilot program is to ensure that …  if Cook County really is focused on keeping homeowners in their properties, and they believe they have the ability to do that, then let’s see that proven.”

The bill also establishes new notice requirements to ensure that property owners know their rights, how to get help paying their tax debts and what could happen if they don’t.

Negotiations

Illinois is the last state to come into compliance with Tyler because, despite years of negotiations between lawmakers, stakeholders and advocates, those involved struggled to find a statewide solution.

“90% of the bill, everybody was in agreement with,” Villanueva said. “The question was, how do we ensure that we have a policy that is statewide that works for everybody, because the county (Cook) is always going to be slightly different than everybody else.”

Rose, Villanueva and Preston each said they support larger property tax reforms in the future to address why residents are falling behind on their payments in the first place.

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundatio