In early September, The Washington Post ran a story — the result of a 10-month investigation — about how Washington, D.C., sold debt that residents owed the city. In some cases, people lost their homes over just a few hundred dollars in owed property taxes. Within a week, D.C.’s mayor announced reforms. Last night, Philadelphia’s City Council approved such sales, with some notable restrictions.
In and of itself, it is not unusual for governments to sell tax liens, which are claims to property in lieu of unpaid taxes. It’s a way to outsource debt collection to the private sector and every state has such laws, according to reports. But, without the right restrictions, it can encourage predatory debt collection. Here’s how The Post described the practice in D.C.:
For decades, the District placed liens on properties when homeowners failed to pay their bills, then sold those liens at public auctions to mom-and-pop investors who drew a profit by charging owners interest on top of the tax debt until the money was repaid.
But under the watch of local leaders, the program has morphed into a predatory system of debt collection for well-financed, out-of-town companies that turned $500 delinquencies into $5,000 debts — then foreclosed on homes when families couldn’t pay, a Washington Post investigation found.
The Philadelphia bill, which passed in a 15 to 2 vote, has to be signed by the mayor and includes some restrictions. Selling liens less than $1,000 is banned, for example. (After The Post series ran, D.C. Mayor Vincent C. Gray banned sales of tax liens below $2,500 on primary residences.) It also included caps on attorneys fees and, importantly, capped interest rates charged by lien holders at 10 percent. The Philadelphia bill also imposes a two-year waiting period before a home can be foreclosed on.
“Using tax lien sales, we can bring in an additional $50-60 million in revenue for the City and School District,” one of the bill’s sponsors, Councilman Bill Green (D), said in a statement about Thursday’s vote.
Delinquent taxes are a big deal for Philadelphia. The city and school district were owed $290 million on more than 100,000 properties as of April 2012, according to a June report from the Pew Charitable Trusts. Over several years, the city should be able to collect about $155 million of that, the authors estimated. The city government has a lot of discretion over collection policies compared to local governments in other Pennsylvania counties and other states, too, the Pew report found.
But that kind of power can make or break some of the most vulnerable residents. In 2012, the nonprofit National Consumer Law Center reported that every state allowed local governments to sell property tax liens. But unless they are updated, the complicated set of regulations around the practice can lead to dire consequences for some.
“Inadequate notice and a lack of judicial oversight over the process leave many homeowners in the dark about steps they can take to avoid a home loss,” the report’s authors wrote. “Homeowners most at risk are those who have fallen into default because they are incapable of handling their financial affairs, such as individuals suffering from Alzheimers, dementia, or other cognitive disorders.”
Whether the Philadelphia bill’s restrictions are enough to protect those populations will have to be seen. If the mayor signs the bill, it would go into effect in mid-November.