Abuse in tax lien sales

by Walter Olson on July 20, 2012

One way to rein in some of the abuses — see this CNN story — would be to curb arbitrary impositions of “interest” at far higher than actual market interest rates. Very similarly, requiring the use of realistic rather than inflated interest rates would be one way to restrain tax-farming “probation” firms and other abusive privatization of law enforcement, much in the news lately, and also excessive damage awards in civil litigation (where “prejudgment” and “postjudgment” interest is often set at notional and absurdly generous levels.)

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A “judicially sanctioned extortion racket” - Overlawyered
07.26.12 at 3:45 pm

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1 JWB 07.20.12 at 6:40 pm

There have been times when statutory interest rates on judgments were above-market and times when they were below-market. I think sometimes legislatures reacted to complaints that the rates were too low by raising them just as market rates started to move the other direction . . . Some jurisdictions have tried to use variable market-based rates, but those are harder to administer. There’s also the question of what “market rate” the statutory rate should be trying to approximate, given that judgment debtors in general are not always the best credit risks (and you can’t expect a court to administer a system where different rates are charged depending on the FICO scores of the particular judgment debtor . . .). In some jurisdictions, the defendant may be able to put the disputed amount into an interest-bearing escrow and be protected from having to pay any interest above what the escrow account actually earns during the pendency of the dispute.

2 Walter Olson 07.21.12 at 4:45 am

Yes, I recall the days when interest rates were in double digits and allowable prejudgment interest for plaintiffs lagged way behind in some states, working an injustice on some plaintiffs as well as giving some defendants reason to drag their heels. But surely a litigation system that considers itself competent to calculate forty-year future economic damage projections can adopt better formulas for retrospective calculation of the value of money over time.

On the problem that judgment debtors are subprime risks, yes, that would be worth addressing in arranging the incentives, but preferably not by the introduction of mere arbitrary error into interest rate calculations.

3 Xmas 07.23.12 at 1:41 pm

As a second-hand “victim” of this process**, I have little sympathy for the home-owners. The local tax authorities have already gone through the process of trying to collect taxes from the homeowner by the point these outside companies get involved. If you’ve ignored your local tax, water and sewer bills, that’s your own fault.

Setting the interest rates at something “reasonable” won’t cure this problem. The collection agencies are running on the vig, so they’ll be more than happy to work on a payment plan that draws out the payment timeline. Cap the interest rates, the collection agencies leave the market, and the cities will still foreclose on the homes. They’ll need to much more aggressive than a collection agency as the city’s livelihood depends on absolute cash flow.

These collection agencies actually hate foreclosing, as it is a big expense to pay for lawyers and then cleaning and refurbishing the homes.

**The house I was renting was taken in a tax foreclosure. My landlord had failed to pay any city bills for 4 years and was ducking all bill collectors for just as long. The tax lien and missed water and sewer bills piled up before the home was foreclosed upon. What’s funny is that the bank that held the mortgage on the property didn’t intervene in the process. Tax liens take precedence over mortgage liens, so the bank lost out on reclaiming the property.

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