Michigan: Complete Surplus Funds Recovery Guide — Tax & Mortgage Foreclosure
Overview
Michigan operates a dual foreclosure system: mortgage foreclosures can proceed either judicially or non-judicially (foreclosure by advertisement), while tax foreclosures follow a specific statutory process under the General Property Tax Act. Michigan has been at the center of post-Tyler surplus fund reform, as the state's prior practice of retaining all tax foreclosure sale proceeds was directly analogous to the practice struck down in Tyler v. Hennepin County.
Key agencies holding surplus funds:
- County Treasurer (tax foreclosure surplus)
- County Circuit Court Clerk (judicial mortgage foreclosure surplus)
- Foreclosing attorney/trustee (non-judicial mortgage foreclosure surplus)
- Michigan Department of Treasury (state-level oversight)
- Michigan Unclaimed Property Division (escheated surplus)
Michigan's tax foreclosure system has undergone rapid reform since Tyler, creating both opportunities and procedural uncertainty for surplus claimants.
Tax Foreclosure Surplus
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How Tax Sales Work in Michigan
Michigan uses a tax deed system governed by the General Property Tax Act (GPTA), MCL 211.1 et seq., with the critical foreclosure provisions in MCL 211.78 through 211.78q.
The process operates on a strict timeline:
- Year 1: Property taxes become delinquent on March 1. The local treasurer adds penalties and interest.
- Year 2 (March 1): Delinquent taxes are forfeited to the County Treasurer. The county takes over collection.
- Year 3 (March 31): If taxes remain unpaid, the property is foreclosed by the County Treasurer through a judicial proceeding in Circuit Court. The County Treasurer files a petition listing all properties to be foreclosed.
- Redemption deadline: Property owners have until March 31 of Year 3 to redeem by paying all delinquent taxes, interest, penalties, and fees (MCL 211.78g).
- Title transfer: After the redemption deadline, title vests in the County Treasurer (MCL 211.78k).
- Auction: The County Treasurer (or the Michigan Land Bank, in some cases) sells the property at public auction, typically conducted in two rounds. The first round requires a minimum bid equal to the total delinquent taxes, penalties, interest, and costs. Properties not sold in the first round go to a second round with lower minimums.
Pre-Tyler practice: Before Tyler and subsequent Michigan reforms, the County Treasurer retained all sale proceeds, regardless of how much the property sold for above the tax debt. A property with $5,000 in delinquent taxes that sold for $80,000 generated $75,000 in surplus — which the county kept.
Post-Tyler: Michigan's legislature enacted Public Act 256 of 2020 (effective July 2020) amending MCL 211.78t, which requires counties to remit surplus proceeds to the former owner. This was further strengthened by the Michigan Supreme Court's decision in Rafaeli, LLC v. Oakland County (2020), which held — before Tyler — that Michigan's retention of surplus from tax foreclosures violated the Michigan Constitution's Takings Clause. Tyler subsequently confirmed this at the federal level.
Under the current framework (MCL 211.78t as amended), former owners are entitled to surplus proceeds from tax foreclosure auction sales exceeding the minimum bid amount (which covers the delinquent taxes, interest, penalties, and fees).
Who Holds Surplus Funds
- County Treasurer holds surplus from tax foreclosure auctions
- Michigan Department of Treasury provides oversight
- Michigan Unclaimed Property Division holds escheated surplus
Claim Deadline / Escheatment Window
Under MCL 211.78t, the former owner must file a claim for surplus within one year of the foreclosure auction. After one year, unclaimed surplus is transferred to the county's general fund.
However, the Michigan Unclaimed Property Act (MCL 567.221 et seq.) may provide additional recovery avenues for escheated funds. Former owners should also check the Michigan Department of Treasury's Unclaimed Property database.
For pre-reform sales (before July 2020), former owners may have claims under Rafaeli and Tyler, but these typically require litigation and the statute of limitations issues are actively being litigated in Michigan courts.
Redemption Period
The redemption period ends March 31 of the third year following the year taxes were originally due. For example, if 2022 taxes became delinquent, the property would be forfeited in March 2024 and the redemption deadline would be March 31, 2025.
During the redemption period, the owner can pay all delinquent taxes, penalties, interest, and fees to reclaim the property. Michigan also allows partial payment plans under MCL 211.78q for owner-occupied residential property.
Claim Process Step-by-Step
- Confirm the foreclosure and sale. Contact the County Treasurer to confirm your property was foreclosed and sold at auction, and the sale price.
- Request surplus information. Ask the County Treasurer for the surplus amount (sale price minus minimum bid/total tax debt).
- Obtain the claim form. Each county has its own surplus claim form. Many counties post these on their websites.
- Complete and submit the claim. Include: proof of ownership at the time of foreclosure (recorded deed), government-issued ID, Social Security Number or Tax ID (for tax reporting), and current mailing address.
- Submit within one year. The claim must be filed within one year of the auction date under MCL 211.78t.
- County review. The County Treasurer reviews the claim, verifies ownership, and checks for competing claims from lienholders.
- Receive payment. Approved claims are paid by county check, typically within 30-90 days of approval.
Fee Caps on Recovery Agents
Michigan does not have a specific statutory cap on surplus recovery agent fees for tax foreclosure surplus. However, MCL 211.78t's one-year claim window and the direct-to-county-treasurer process make it relatively straightforward for owners to file claims themselves. AuctionBlock's $4,999 flat fee is positioned as a cost-effective alternative for owners who need assistance navigating the process or who have complications (deceased owner, multiple properties, lien issues).
Mortgage Foreclosure Surplus
Judicial vs. Non-Judicial Process
Michigan permits both judicial and non-judicial mortgage foreclosures:
- Foreclosure by Advertisement (Non-Judicial): The most common method, governed by MCL 600.3201-3285. The lender publishes notice of sale in a local newspaper for four consecutive weeks and posts notice on the property. The sale is conducted by the sheriff at public auction.
- Judicial Foreclosure: Governed by MCL 600.3101-3180. The lender files a lawsuit in Circuit Court. Less common because it is slower and more expensive, but may be used when foreclosure by advertisement is not available (e.g., defects in the mortgage).
Who Holds Surplus
- Foreclosure by Advertisement: Surplus is held by the sheriff who conducted the sale. Under MCL 600.3228, the surplus is paid to the Circuit Court for the county. The former owner or other claimants must petition the court for disbursement.
- Judicial Foreclosure: Surplus is held by the Circuit Court Clerk and distributed pursuant to court order.
Lien Priority Order
- Costs of the foreclosure and sale
- The foreclosing mortgage
- Real property taxes (may have super-priority)
- Junior mortgages in order of recording
- Judgment liens in order of filing
- Construction liens under the Michigan Construction Lien Act (MCL 570.1101 et seq.)
- Federal tax liens (IRS)
- The former homeowner
Deficiency Judgment Rules
Foreclosure by advertisement: Under MCL 600.3280, if the property sells for less than the debt at a non-judicial foreclosure, the lender may sue for a deficiency judgment within two years of the sale. However, the deficiency is limited to the difference between the debt and the property's fair market value at the time of sale (not the sale price).
Judicial foreclosure: The court determines the deficiency as part of the judicial proceeding.
When surplus exists, there is no deficiency.
Claim Process Step-by-Step
- Identify the foreclosure type. Check the county register of deeds for a Sheriff's Deed (foreclosure by advertisement) or court records for a judicial foreclosure.
- For foreclosure by advertisement: Contact the county sheriff's office to confirm surplus exists and its amount.
- File a petition with the Circuit Court. Under MCL 600.3228, petition the court for release of surplus funds. The petition must establish your identity, ownership interest, and right to the surplus.
- Serve interested parties. All known lienholders and parties with potential claims must be served.
- Attend the hearing. The court reviews competing claims and determines distribution.
- Obtain court order. The judge orders disbursement of surplus.
- Collect funds. Present the order to the court clerk for payment.
For judicial foreclosure, the process is similar but occurs within the existing court case.
Attorney Requirements
Michigan does not require an attorney for surplus claims, but the court petition process — particularly for foreclosure by advertisement surplus — involves procedural requirements that benefit from legal guidance. In complex cases with multiple claimants, attorney representation is strongly recommended.
Tyler v. Hennepin Impact
Michigan has been one of the states most directly affected by the Tyler v. Hennepin decision, and the state's own precedent in Rafaeli, LLC v. Oakland County, 505 Mich. 429 (2020) actually preceded Tyler. In Rafaeli, the Michigan Supreme Court held that Michigan's tax foreclosure system violated the state constitution's Takings Clause when counties retained surplus proceeds.
The Michigan legislature responded with Public Act 256 of 2020, which amended MCL 211.78t to require surplus distribution. Tyler then cemented this principle at the federal constitutional level.
Key post-Tyler/Rafaeli developments in Michigan:
- Counties are required to distribute surplus from tax foreclosure auctions to former owners under MCL 211.78t.
- A one-year claim deadline applies to surplus claims.
- Retroactive claims for pre-2020 foreclosures are being litigated. The Michigan Supreme Court is considering the scope of retroactive relief. Some federal lawsuits have resulted in settlements with counties.
- Several Michigan counties have established dedicated surplus fund distribution programs.
- The Michigan State Housing Development Authority (MSHDA) has published guidance on surplus fund rights.
The combination of Rafaeli and Tyler makes Michigan one of the strongest states for surplus fund recovery, but the one-year deadline means timely action is essential.
Edge Cases
Deceased Owner: If the former owner died before or after the foreclosure, the estate's personal representative (executor or administrator) must file the surplus claim. Probate must be opened in the county where the decedent resided. For small estates (under $25,000 in assets other than real property), Michigan's small estate affidavit process under MCL 700.3982 may be available.
Divorce: Michigan is an equitable distribution state under MCL 552.19. The divorce judgment's property division controls surplus distribution between ex-spouses. If the divorce was finalized before the foreclosure, only the spouse awarded the property interest has standing to claim surplus.
Bankruptcy: The automatic stay (11 USC Section 362) may pause surplus fund disbursement. If the debtor's bankruptcy case is open, the bankruptcy trustee has standing to claim surplus as property of the estate. If the case is closed and the surplus was not scheduled as an asset, the debtor may claim it directly, but should consult bankruptcy counsel.
HOA Liens: Michigan condominium associations have lien rights under MCL 559.208 for unpaid assessments. These liens are junior to first mortgages but may have priority over other junior liens. HOA liens must be satisfied from surplus before the former owner is paid.
IRS Liens: Federal tax liens are entitled to priority based on their recording date. The IRS has a 120-day right of redemption for tax sale properties under 26 USC Section 7425. IRS liens reduce the surplus available to the former owner.
Multiple Lienholders: When multiple parties claim surplus, the Circuit Court conducts a priority hearing. The court's determination is based on lien recording dates, lien type, and applicable priority rules. All known lienholders should be joined in any surplus petition.