Illinois Property Tax law provides an interest rate of 18% for tax debts where the debtor does not intend to redeem the property, even where the debt is owned by tax purchaser at the time of the debtor’s chapter 13 petition. In re Drake, No. 21-4903 (Bankr. N.D. Ill. Feb. 23, 2022).
The debtor failed to pay Illinois property taxes on her real property and Integrity Investment Fund, LLC, purchased the tax debt (“Sold Taxes”). Over the next few years, the debtor failed to pay the property taxes and Integrity, in accordance with its rights as the tax debt purchaser, paid the taxes (“Subsequent Taxes”) and added the amount to the debt. The debtor did not redeem the property by paying the delinquent tax debt as permitted by Illinois law. Instead, she filed for chapter 13 bankruptcy and proposed a plan under which she would pay off the debt of $30,711 at a 0.5% interest rate. Integrity objected to confirmation of the plan, arguing, in part, that the appropriate interest rate was 18% for the tax debts. The debtor objected to Integrity’s claim.
Because Integrity objected to treatment of its claim in the plan, section 1325(a)(5)(B) required that in order for confirmation, the plan must pay off the amount of the claim, including interest, in equal monthly payments. The sole issue before the court was the appropriate interest rate for the tax debt.
In the absence of a specified interest rate on a secured claim in bankruptcy, courts apply the rate determined in Till v. SCS Credit Corp., 541 U.S. 465, 469 (2004), which is the prime rate adjusted to account for risk of nonpayment. However, in the case of tax debts, Congress enacted section 511 which specifically provides:
“(a) If any provision of this title requires the payment of interest on a tax claim or on an administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of a tax claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.”
The court found that the Sold Taxes and Subsequent Taxes, were “tax claims” within the meaning of section 511(a) and looked to nonbankruptcy law for the appropriate interest rate.
Relying on Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002), the debtor argued that Illinois does not have an interest rate on tax debts. She argued that the court should determine the appropriate rate under 28 U.S.C. § 1961, which provides the federal post-judgment interest rate and which was 0.06% at the time of her bankruptcy petition.
The court found Cardelucci to be inapplicable. That case involved section 726(a)(5) which prioritizes debts in chapter 7 and specifies that interest on claims “at the legal rate” is fifth priority for distribution. The court noted that section 511 was enacted three years after Cardelucci was decided and did not use the same language as that used in section 726(a).
Rather, the court found the interest rate could be found in Illinois Property Tax Law. The court discussed at some length the case of In re Villasenor, 581 B.R. 546, 548 (Bankr. N.D. Ill. 2017), where, like Integrity, the tax creditor purchased the debtor’s tax debt and paid subsequent taxes. That creditor sought interest on repayment at the rate of 24%. The court in that case looked at Illinois Property Tax Code, 35 ILCS 200/21-25 (relating to tax debts based on administrative error), 35 ILCS 200/21-355(b) (relating to tax penalties) and (c) (relating to interest rate when a debtor intends to redeem), to determine which if any set the appropriate interest rate.
The court here found that none of the options addressed by the Villasenor court applied here. Specifically, with respect to 35 ILCS 200/21-355(c), the court noted that the debtor was not exercising her right of redemption through the plan, but was merely treating the underlying tax debt. “Since the plan is treating Integrity’s secured claim rather than exercising a right of redemption, the 12% penalty that 35 ILCS 200/21-355(c) imposes each year or portion thereof intervening between the date of payment and the date of redemption is inapplicable.”
The court then turned to section 35 ILCS 200/21-15 which provides:
“Except as otherwise provided in this Section or Section 21-40, all property upon which the first installment of taxes remains unpaid on the later of (i) June 1 or (ii) the day after the date specified on the real estate tax bill as the first installment due date annually shall be deemed delinquent and shall bear interest after that date at the rate of 1 1/2% per month or portion thereof.”
The debtor argued that this section was inapplicable because her plan was not paying unpaid taxes, but was paying a separate debt. The court disagreed. It found that Integrity purchased the tax debt and therefore its claim represented a delinquent tax debt. As such, the debt was subject to the tax rate in section 35 ULCS 200/21-15, and Integrity had a right to receive an interest rate of 18% on the Sold Tax and Subsequent Tax claims.
The court concluded that “the Debtor must propose a plan that provides 18% interest on Integrity’s Tax Claim as well as a Till-determined rate on the remainder of Integrity’s claim.”
Tags: Interest Rate, tax debt
