Home Equity Theft After Foreclosure: How States Are Circumventing the Tyler Ruling

Despite a landmark 2023 Supreme Court decision declaring the practice unconstitutional, homeowners in at least six states continue to lose their homes and all their built-up equity over small property tax debts. Home equity theft occurs when a local government forecloses on a property, sells it for more than the owed debt, and keeps the entire surplus profit. This article details how states are creating complex legal hurdles that prevent homeowners from reclaiming what is rightfully theirs, even after the Supreme Court's ruling in Tyler v. Hennepin County.

What Is Home Equity Tax Foreclosure?

Property tax foreclosure is a legal process where a local government seizes a property due to unpaid property taxes. When the government sells that property, any money from the sale that exceeds the overdue taxes, plus interest, penalties, and costs, is considered a surplus or equity. Historically, some states kept this surplus. In 2023, the U.S. Supreme Court ruled in Tyler v. Hennepin County that this practice constitutes an unconstitutional taking under the Fifth Amendment, mandating that surplus funds must be returned to the former homeowner.

What Did the Supreme Court Rule in the Tyler Case?

The precedent-setting case involved Geraldine Tyler, a Minnesota homeowner. Hennepin County foreclosed on her condo over a $2,300 tax debt that had ballooned to $15,000 with fees and interest. The county sold her $93,000 condo for $40,000 and kept the entire $25,000 profit. The Supreme Court ruled unanimously that the government cannot take more property than it is owed, with Chief Justice John Roberts writing that "a taxpayer must render unto Caesar what is Caesar’s, but no more." This decision was expected to end home equity theft nationwide.

Why Are Homeowners Still Losing Equity?

While over a dozen states reformed their laws after the Tyler decision, legal experts like Christina Martin of the Pacific Legal Foundation argue that some states have implemented reforms that are "little more than legal gymnastics." Instead of automatically returning surplus funds, these states have created complex, pre-emptive claim processes. Homeowners, often vulnerable due to age, disability, or financial hardship, must navigate strict deadlines and legal procedures before a sale even occurs. Missing a single step can result in the permanent loss of tens or hundreds of thousands of dollars in home equity.

Which States Pose the Highest Risk Today?

Based on current statutory analysis, homeowners in the following six states face significant legal hurdles to reclaiming their equity after a tax foreclosure.

1. New York New York law requires property owners to proactively demand compensation to preserve a future claim to any surplus equity. If this demand is not made, the government can transfer the property without a sale, allowing a new owner to inherit the previous owner's equity. Even if a sale occurs, the original owner must file a separate claim to recover proceeds.

2. Michigan The process in Michigan is particularly arduous. To preserve their rights, homeowners must submit a notarized form before their home is auctioned—a time when it's impossible to know if a surplus will exist. If successful, owners must then file a motion, appear in court, and pay a 5% sales commission on any equity recovered. It is estimated that less than 5% of owners successfully navigate this system.

3. New Jersey Homeowners in New Jersey must request a judicial sale or internet auction after a lien holder initiates foreclosure but before the court's final judgment. This narrow window and the requirement to file formal court documents mean that missing the deadline results in a complete forfeiture of any right to surplus proceeds.

4. Alabama Alabama law requires homeowners to formally request a sale before the redemption period ends, often without clear notice. Failure to do so can result in the property being forfeited to the state or a private lien holder, who can then keep or sell the property and retain all proceeds. A 2024 law intended to prevent equity theft still places the entire burden on the owner to initiate the process.

5. Nebraska Nebraska's post-Tyler system requires property owners to request a sale during foreclosure. A court then decides if a sale is likely to yield more than $2,500 in surplus. If the owner fails to make the request or the court determines the threshold won't be met, the property can be transferred without a sale, and the equity is lost.

6. Illinois Illinois employs a different model. Counties sell tax liens on delinquent properties to private investors. Homeowners have a 2.5-year redemption period to pay their debt. If they fail, the investor can take full ownership and is entitled to 100% of the profits from any subsequent sale, effectively legalizing equity theft by a private entity.

What Practical Steps Can Homeowners Take?

For homeowners facing property tax delinquency, proactive measures are critical.

• Act Immediately: Contact your county treasurer's office at the first sign of trouble to discuss payment plans or hardship programs.
• Understand Your Rights: Research your state’s specific tax foreclosure laws. The requirements to preserve equity claims are often obscure and time-sensitive.
• Seek Professional Guidance: Consult with a real estate attorney experienced in property tax matters. Based on our experience assessment, professional legal help is often necessary to navigate these complex procedures.
• Document Everything: Keep meticulous records of all communications, tax bills, and filed forms.

The key takeaway is that the burden to act is overwhelmingly on the homeowner. The Supreme Court affirmed your right to your home’s equity, but protecting it requires navigating a maze of state-specific deadlines and legal filings. As legal challenges continue, the hope is for simpler, more equitable systems that automatically return surplus funds to their rightful owners.