For Years, Oregon Stole People's Home Equity Over Modest Tax Debts. A New Law Puts an End to That.

The governor of Oregon last week signed a bill gutting the government’s ability to seize homeowners’ surplus equity when it forecloses on a property to collect a tax debt. It’s a positive development in a long-running legal saga that has seen governments across the U.S. seize and sell people’s homes over modest tax debts—and then keep the profits.

The bill’s passage attracted virtually no media attention. But the legislation approved by Gov. Tina Kotek, a Democrat, is among the most robust responses yet to an insidious practice that some states are still finding ways to preserve.

Under Oregon’s law, homeowners will receive clearer notice of overdue taxes. If someone is still not able to make those payments and ultimately loses their home to foreclosure, they will receive the leftover equity—after their tax debt has been satisfied—via the state’s streamlined abandoned property process. (Local governments typically exert control here, complicating an already-convoluted experience.) But perhaps most important is that the law requires government officials to enlist a real estate agent to sell foreclosed residential properties, helping ensure that owners receive equity that reflects the home’s market value.

The law comes a little over two years after the Supreme Court’s decision in Tyler v. Hennepin County, in which the justices unanimously ruled it was unconstitutional when the government seized an elderly woman’s condominium over a modest tax debt, sold it, and kept the profit from the sale. It has long been understood that governments can foreclose on property to collect a tax debt.

But many states were taking it much further. “A taxpayer who loses her $40,000 house to the State to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed,” wrote Chief Justice John Roberts. “The taxpayer must render unto Caesar what is Caesar’s, but no more.” Doing otherwise, the Court said, is a violation of the Takings Clause of the Fifth Amendment, which promises that the government cannot take private property without “just compensation.”

The plaintiff in that case, Geraldine Tyler, had fallen behind on her taxes after a series of neighborhood incidents—including a nearby shooting—prompted her to move to a retirement home, making it difficult for her to afford both her rent and the taxes on her condominium. The ordeal kicked off a yearslong battle, which she originally lost at the U.S. Court of Appeals for the 8th Circuit. Tyler was 94 years old at the time of the Supreme Court’s ruling.

Oregon’s law may sound redundant in light of the high court deeming the practice, often known as home equity theft, illegal. But several states across the U.S. have gotten creative with debt collection statutes, which may technically comply with the law of the land but still make it very difficult for owners to retrieve their surplus equity after satisfying their tax debt.

One such example is Michigan. That state was, in theory, ahead of the game. In 2020, its Supreme Court said it was unconstitutional when the government seized Uri Rafaeli’s home, sold it, and kept all of the proceeds after he underpaid his tax bill. Rafaeli’s initial debt, dear reader, was $8.41.

The Legislature responded with a debt collection law whose complexity appears to be a feature, not a bug, setting people up to fail as they try to retrieve what is theirs.  One such person, Chelsea Koetter, is suing to render that legislation unconstitutional after Manistee County seized her home over a $3,863.40 debt—which included penalties, interest, and fees—sold it, and kept the $102,636 profit. The government withheld her surplus equity because, according to her lawsuit, she submitted a form eight days late.

“Following foreclosure, and before any property is sold or the amount of surplus, if any, is known, owners must properly serve a notarized and completed claim form with the foreclosing government unit within 92 days,” says Koetter’s complaint, which she filed a year ago. “Approximately a year after foreclosure, and many months after the sale of their properties, owners must file a separate motion in the foreclosure action that took their homes, seeking distribution of any surplus proceeds. Failing to meet the first condition renders futile any attempt to meet the second condition. When property owners fail to follow both procedures to the letter, counties keep the proceeds as a windfall.”

For its part, Oregon “previously took entire properties as payment for much smaller tax debts, giving counties huge windfalls,” says Christina Martin, the senior attorney at Pacific Legal Foundation who successfully litigated the case before the Supreme Court that brought down home equity theft. “Before Tyler, both a federal court and state trial court had approved of the confiscations, rejecting arguments that they were violating the Takings Clause.”

In other words, Oregon was no angel. But its recent legislation is proof that states can learn from their past mistakes and actually comply with the law—not just in theory, but also in practice.

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