Alabama
How It Works
Alabama counties have two tax foreclosure methods. Under one method, the government auctions a certificate of purchase to the highest bidder. The certificate does not transfer title, although the certificate holder can take immediate possession of the property. If the homeowner doesn’t redeem the property within three years, the government keeps any excess proceeds from the sale. Because the certificate of sale does not immediately transfer title, these properties often sell for much less than their actual value, meaning that investors also take a windfall.
Alternatively, the county may sell a tax lien on the delinquent property. A tax lien allows the purchaser to foreclose on the property and take title and all equity after three years.
The Impact
The State of Alabama requires those requesting public records to reside in the state. This requirement has made it difficult for us to measure the size and scope of home equity theft in Alabama.
Why It Matters
In 2009, Thomasyne Eldridge did what many daughters with aging mothers do: she moved her mother, Edna, in to live with her and her husband. When Edna moved, she kept her home in Jefferson County, Alabama, but the post office failed to forward her mail. She never paid her 2011 property taxes because the bill was not forwarded to her daughter’s address, and Edna believed she was exempt because of her age.1
In 2018, out of nowhere, Thomasyne was contacted by a company that said it held a tax deed to her mother’s property. A representative told her that Jefferson County had sold Edna’s home to the company on May 22, 2012, because the 2011 property taxes had not been paid.2
In Alabama, if someone underpays his or her property taxes, the county can sell a tax deed for the overdue amount to the highest bidder. If the delinquent owner cannot afford the payment required to reclaim full ownership of his or her property before the redemption period expires, the tax deed holder, a private investor, eventually gets full ownership.
Until the buyer contacted her, neither Thomasyne nor Edna knew the property had been sold to pay off delinquent taxes. If Edna had received a notice about the tax sale before May 2012, she or her daughter could have easily paid what she owed to prevent her home from being taken and sold.3
The total taxes and interest due when Jefferson County sold the tax deed on Edna’s home was $2,047.91. Jefferson County sold the tax certificate for $21,047.91. The county pocketed the $19,000 difference between the amount Edna owed and the amount for which it sold the tax deed. Edna did not receive a penny, and her actual loss was far higher.4
According to Jefferson County’s assessment, Edna’s property was valued at more than $127,000 at the time of sale. In other words, the county took $19,000 in equity and the purchaser of the tax deed got the remaining $126,000 in equity that Edna had built up in her home over 30 years—all to cover a $2,000 debt of which she was not aware.5
Around the time Thomasyne learned about the property transfer, the company that held the tax deed to Edna’s property filed a lawsuit asking the court for full ownership. Thomasyne was unaware that she had the right to redeem her mother’s property, but even if she had known, she could not have afforded the redemption payment at this time. The original $2,000 debt had ballooned to over $30,000 due to punitive interest and fees over six years.6
Thomasyne and her husband filed for bankruptcy a month later. The extra time and expenses involved in Edna’s care over the previous nine years resulted in tremendous financial stress, and they struggled to make ends meet. The couple fell so far behind on their own bills and property taxes that they had to file for bankruptcy to save their home from foreclosure.7
The extreme financial stress that Thomasyne and her husband experienced could have been avoided. Had Jefferson County not taken Edna’s home, Thomasyne could have rented or sold it for extra income. If Thomasyne had known about her mother’s house being sold for taxes in time, she could have afforded to redeem the property in 2012 when the debt was still manageable.8
A few months after the notice from the private investor, late in 2018, Edna passed away.
The $125,000 surplus from the tax sale that Jefferson County and the private investor pocketed represents home equity theft. The Fifth Amendment to the U.S. Constitution forbids the government from keeping more than what is owed. The county and the private investor must return these funds to Edna’s heir, Thomasyne.
Resources
Statement of Principles on Ending Home Equity Theft
Alabama top court says local governments can’t pocket excess money from tax auctions
Legal Appendix Download
State Summaries Download
Alabama Home Equity Theft Laws
Does the law commonly protect owners’ equity?
- Analysis
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No.
- Citation
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Ala. Code §§ 40-10-28(a)(1), -192.
Are there any exceptions to that rule?
- Analysis
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Maybe. Under the state’s land sale procedure, the government has a “duty . . . if practicable” to sell the smallest piece of the debtor’s real estate “necessary to satisfy the decree under which it is sold and the expenses of the sale.” In theory, this could protect equity. However, it is unclear how often the government finds it “practicable” to sell smaller pieces of a debtor’s property.
Moreover, a recent Alabama Supreme Court decision casts doubt on the constitutionality of confiscating an owner’s equity when collecting taxes.
- Citation
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Ala. Code § 40-10-16; see Douglas v. Roper, No. 1200503, 2022 WL 2286417 (Ala. June 24, 2022).
Does the government sell tax liens, or does it sell property outright, and what procedures does it use for the sale?
- Analysis
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There are two different procedures: one that operates as a hybrid tax-lien/tax-deed procedure and one that operates strictly as a tax lien procedure. In the hybrid land sale procedure, the government sells a certificate of purchase at a public auction to the highest bidder. This sale does not transfer title, and redemption remains open; the certificate holder must use an administrative procedure to apply for a tax deed upon expiration of a three-year redemption period. However, the certificate holder is entitled to immediate possession of the property.
Alternatively, in the tax lien sale procedure, the government sells a tax lien at a price fixed by the amount of the debt, and bidders bid down on the interest rate they will charge for redemption. The lienholder may bring a judicial foreclosure action within three years of the sale, which gives the lienholder the power to take full title to the property without any compensation for the debtor’s equity.
- Citation
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Ala. Code §§ 40-10-15(a), -29, -74, -184, -197.
What interest and penalties accrue for delinquent taxes, and who collects them?
- Analysis
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Delinquent taxes accrue interest at a rate based on the federal underpayment rate per 26 U.S.C. § 6621, which has ranged from 3–9% since 2000. After a land sale, redemption carries an additional 8% interest on the surplus portion of the purchase price up to 15% of the market value of the property. After a tax lien sale, the interest rate is whatever rate was offered by the successful bidder (with a maximum of 12%).
- Citation
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Ala. Code §§ 40-1-44; -122; -184(b). See U.S. Department of Labor, IRC 6621 Table of Underpayment Rates, https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs/vfcp/table-of-underpayment-rates (last visited Sept. 22, 2022).
What is the redemption period—the length of time to pay the debt prior to permanently losing title?
- Analysis
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The minimum redemption period under both procedures is three years from the time of sale. If the government is the purchaser at a land sale, redemption is available until the property is disposed of otherwise. If a tax lien is sold, redemption is available until the issuance of a final judgment of foreclosure.
Note that in the land sale procedure, the redemption amount is the purchase price, not the tax debt. The surplus is later refunded to the party making redemption.
- Citation
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Ala. Code §§ 40-10-120, -197.
If equity is stolen, who profits?
- Analysis
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In a land sale, the profit from the sale is kept by the government. Because the sale may be voided by redemption, properties commonly sell for significantly less than would be received in other types of auctions. Thus, investors also commonly enjoy a windfall at the debtor’s expense.
In a tax lien sale, the investor keeps all profits.
- Citation
- Ala. Code §§ 40-10-28(a)(1), -184, -197.
How much time does the previous owner have to claim the surplus proceeds, and what are the procedures for claiming them?
- Analysis
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N/A
- Citation
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N/A
What types of foreclosures are used in the state?
- Analysis
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Administrative/judicial hybrid (used in the land sale procedure) or pure judicial (used in the tax lien sale procedure).
- Citation
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Ala. Code §§ 40-10-1, -8, -29; -197.
What types of notice does the state require?
- Analysis
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(1) Notice of delinquent taxes and impending land sale, (2) second notice of impending land sale, (3) notice of impending tax lien sale, and (4) notice of intent to file a foreclosure petition.
- Citation
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Ala. Code §§ 40-10-4, -3, -6, -12, -182, -197.
1 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019, Ala. Code § 40-9-19(a)(2) (2022).
2 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
3 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
4 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
5 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
6 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
7 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.
8 Affidavit of Thomasyne Eldridge, State of Alabama, October 25, 2019.