If you own a home, you know that you have to pay real estate taxes. If you don’t pay an installment of taxes, then after a year the county can sell the property at a tax sale. The tax sale is an auction, but unlike other auctions, bidders don’t bid up the price, they bid down the interest rate. Since most property owners pay their taxes eventually, tax buyers are usually more interested in getting a high interest rate for the amount they paid than in actually owning the property. So the bidding starts at a high interest rate—say, 24%–and moves downward until one bidder succeeds—a bidder might accept 10% or 12%. This is the interest rate the homeowner has to pay on the tax amount in order to keep the home.

For example, if the unpaid real estate taxes are $10,000, and the successful bidder bids 12%, then if the owner pays the taxes after one year, he or she will have to pay another $1,200 in interest, over and above the $10,000 in taxes.

After the tax sale, there is a redemption period during which the owner can “redeem” the taxes by paying the full amount, plus the interest, plus any other taxes that have come due since the sale, plus some other fees and costs to the county. This period is 2-1/2 years for a residence. For multi-unit and commercial properties the redemption period is shorter.

If the owner doesn’t redeem the taxes before the redemption period, the tax purchaser can apply to the county to get a deed. The owner gets notice of the tax sale, of the running of the redemption period, and of the purchaser’s application for a deed, so the owner has plenty of time and opportunity to raise the money to redeem the taxes. If the taxes aren’t redeemed, the tax purchaser gets a deed and is now the owner of the property. Yes, a tax purchaser can get a $200,000 house for buying the $10,000 in taxes.

Can a bankruptcy stop a tax sale? Yes. In fact, some forms of bankruptcy may allow you to get the property back, even if the purchaser has already gotten a deed.

In Chapter 13 bankruptcy, which involves a repayment plan to pay some part of the total debt you owe, you can propose a plan that pays the past-due taxes over time, up to a five year period. The tax sale process stops, as long as the redemption period has not expired, and you get a chance to bring the taxes current over time.

Chapter 11 works the same way. People think of Chapter 11 as a business reorganization, but individuals can file Chapter 11 if their debts are too large, or their financial situation too complicated, to fit under Chapter 13. In Chapter 13 or Chapter 11, we propose a plan that pays the tax purchaser over time. Very often the tax purchaser, who doesn’t want to get repaid over five years, will have the sale canceled, and then tax are paid to the county.

Chapter 7, which involves discharge of debt without a repayment plan, stops the tax sale process, but does not give you an ability to pay the taxes over time. The tax purchaser can wait for the Chapter 7 to be finished (which often takes only three months) or go into bankruptcy court to get permission to go forward with getting the deed after the redemption period.

Even if the redemption period has expired, and the tax purchaser has gotten a deed, the owner can still recover the property in Chapter 13 or Chapter 11. Bankruptcy law provides that a Chapter 13 or Chapter 11 debtor can recover the property because the tax sale is considered a “fraudulent transfer.” A “fraudulent transfer” in bankruptcy law doesn’t have to involve any sort of actual fraud, just a transfer for much less than the property is worth. So if the tax purchaser got a deed to a $200,000 house by paying only the $10,000 in taxes, the purchaser has paid much less than the property is worth, so the owner can file a fraudulent transfer proceeding within the Chapter 13 or Chapter 11. This is a technical proceeding with plenty of pitfalls, so you need a capable and experienced bankruptcy lawyer to go about it.