When a city or county forecloses on and sells someone’s home because they didn’t pay their taxes, the former owner is entitled to any excess proceeds the government gets from the sale, the U.S. Supreme Court ruled in 2023.
But it’s up to the states to change their laws to comply with the court decision, and some have yet to take action. In states that have, many people still have trouble obtaining funds from home sales, often because they miss deadlines officials set to apply for the money.
That’s led to lawsuits in some states, as owners argue they should receive the proceeds if they’ve made a good-faith effort to get it. Local governments counter that without a firm deadline, they can't complete the other steps in the foreclosure process. They also say it's a matter of fairness to all constituents for the same deadline to apply to everyone, regardless of how close they come to meeting it.
Though the Supreme Court’s ruling in Tyler v. Hennepin County, based on a Minnesota case, set the standard for the country, Michigan’s state supreme court had already settled the matter in that state in a 2020 decision. The court said at the time that Michiganders who lose their homes are entitled to post-tax proceeds, and clarified last July that its earlier decision applies retroactively to people whose homes were taken some years prior to the 2020 ruling.
In response, state legislators passed a bill creating a process for people to claim their money. Homeowners have roughly 90 days after a county takes title to a property to file a claim in writing. If they don’t do so within the three-month window, when the county completes the foreclosure process and sells the house, it can keep all proceeds.
Christina Martin, a senior attorney for Pacific Legal Foundation, said in an interview that she views the 90-day deadline as a violation of former owners’ rights, since federal and state courts have made it plain that they have a right to reclaim their money.
“That deadline just seems designed to prevent people from getting their money back. It doesn’t really serve a purpose,” Martin said. “It’s clearly designed to rob people.”
One day short
Martin cited a court case in which she’s representing a Michigan resident who says a county government took sale proceeds that belong to the former homeowner. Lillian Joseph owned 2.5 acres in Crystal Falls, a city on the state’s Upper Peninsula. Iron County took the property on April 1, 2021, over $5,745 in unpaid taxes due three years earlier, along with interest and fees, according to a court document the foundation filed in October.
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In late June, before the deadline, Joseph mailed the required form that contained her sale proceeds to the county treasurer’s office. But because she didn’t put the right suite number on the envelope, her mail didn’t reach the treasurer until July 2, a day after the cutoff. The county sold her former home for $27,500, keeping the $21,755 beyond Joseph’s debt.
Iron County was right to stick to the letter of Michigan’s law rather than giving Joseph a break for making a good effort, Laurie Longo, an attorney for the county, told a state appeals court in a July 2024 hearing.
“It’s not just about her rights, it’s the rights of everyone who has to interact with the system,” Longo said. “There are cutoff dates for everything.”
The appeals court found in the county’s favor in September, and Joseph’s case is now before the state supreme court.
Other states that also expect former owners to formally claim sale proceeds include New York, New Jersey, Alabama and Arizona, Martin said.
Deadlines
It’s unclear how many former property owners could be affected by the U.S. Supreme Court’s Tyler ruling or in Michigan by the state's process for making equity claims. The Pacific Legal Foundation found that Oakland County, near Detroit, sold 196 foreclosed properties in 2022 for more than what was owed, but just nine of the former owners were able to claim sale proceeds.
Alex Alsup, a Detroit-area resident who has researched the tax foreclosure issue, estimated in a recent blog post that some 2,400 people in Wayne County who lost their homes between 2015 and 2019 could be eligible for $20 million in sale proceeds, or an average of $8,300 per former owner. The county treasurer's office did not immediately respond to a request to comment on Alsup’s estimate.
A question facing many states is whether to apply the U.S. Supreme Court’s Tyler ruling retroactively like Michigan did. In Massachusetts, Gov. Maura Healey signed a bill in July that applies Tyler to anyone who lost their home to tax foreclosure up to two years before the 2023 ruling.
The Massachusetts Municipal Association, which represents city and town governments, urged Healey without success not to apply the requirement to give owners sale proceeds if their cases preceded the supreme court decision. The group pointed out that local governments had followed the law in effect prior to the Tyler ruling.
“With tight municipal budgets in virtually every municipality, this type of financial exposure would likely translate into reductions in programs and services, reductions in staff, and/or increases in property taxes,” said Adam Chapdelaine, director of the Massachusetts Municipal Association, in a letter to Healey.
In a 2024 report, the National Consumer Law Center, AARP and the American Land Title Association urged states to amend their laws to better protect homeowners from tax foreclosures. In cases where cities do take title to homes and put them on the market, the three groups said states should require them to use real estate agents to try to sell them before conducting a public auction. The report said an agent is likely to be able to sell a home at a higher price than if it’s sold at auction, yielding more sale proceeds for the owner who lost their home.
