Short Answer

Yes. In North Carolina, unpaid property taxes are top-priority liens that must be paid out of the sale proceeds before any surplus is released to you. After paying sale costs, taxes, the foreclosing debt, and any junior liens in order of priority, only the remaining balance (if any) is disbursed to the property owner or other entitled party.

Understanding the Problem

You want to know if unpaid property taxes will cut into the surplus you hope to receive after a foreclosure or tax sale. In North Carolina, this question comes up at or before a surplus funds hearing in the Clerk of Superior Court’s Special Proceedings Division. Here, the key decision is whether delinquent property taxes get paid first from the sale proceeds before any leftover amount can be distributed to you. A hearing on your petition to release surplus funds is already scheduled.

Apply the Law

North Carolina law sets a strict order for how foreclosure or tax sale proceeds are applied. Property taxes are first in line and must be paid from the proceeds before surplus is calculated. The Clerk of Superior Court, in the special proceeding tied to the sale, determines who is entitled to the surplus after the 10-day upset bid period has expired and the sale is final. Respondents served in a special proceeding generally have 10 days to answer, and the clerk can continue a hearing for good cause if more time is needed.

Key Requirements

• Sale produced a surplus: There must be money left after paying sale costs, taxes, and the foreclosing debt.
• Property taxes paid first: County/municipal property taxes (and authorized assessments) are superior liens and are paid before any surplus is calculated.
• Secured debt next: The deed of trust or tax judgment that led to the sale is paid according to statute.
• Junior liens in order: Any remaining funds go to junior lienholders by priority; only then can the owner receive any balance.
• Forum and timing: The Clerk of Superior Court handles surplus issues in the special proceeding after the 10-day upset bid period runs.
• Notice and objections: Parties served in the special proceeding typically have 10 days to answer; disputes over entitlement can delay distribution.

What the Statutes Say

• N.C. Gen. Stat. § 45-21.31 (Application of sale proceeds) – Sets the order for paying sale costs, property taxes, the secured debt, junior liens, and surplus.
• N.C. Gen. Stat. § 105-355 (Tax lien on real property) – Establishes the lien of ad valorem taxes against real property.
• N.C. Gen. Stat. § 105-356 (Priority of tax liens) – Confirms that property tax liens take priority over most other liens.
• N.C. Gen. Stat. § 45-21.27 (Upset bids) – Provides the 10-day upset bid period before a sale becomes final.

Analysis

Apply the Rule to the Facts: Because you have a scheduled surplus funds hearing, the clerk will first ensure that sale costs and any unpaid property taxes are paid from the proceeds. If money remains after the foreclosing debt and any junior liens with priority are satisfied, that balance can be released to you. If unpaid property taxes exist, they reduce the surplus and may leave less—or no—funds for distribution to you.

Process & Timing

1. Who files: The owner, a junior lienholder, or another claimant to the surplus. Where: Clerk of Superior Court (Special Proceedings), in the North Carolina county where the sale occurred. What: A petition or motion to disburse surplus funds, with supporting documents (sale report, payoff statements, lien information). When: After the 10-day upset bid period ends and the sale is final; respondents typically have 10 days to answer after service.
2. The clerk sets a hearing to determine priorities and entitlement. If you need more time to prepare, promptly file a motion to continue explaining your reasons; clerks often consider continuances for good cause.
3. The clerk enters a written order directing disbursement: sale costs and taxes first, then the foreclosing debt, then junior liens by priority, and any remaining surplus to the appropriate party.

Exceptions & Pitfalls

• Tax and assessment priority: County and municipal property taxes and certain local assessments take priority and will be paid ahead of owners and junior creditors.
• Junior lien surprises: Judgment liens, HOA liens, or other encumbrances can reduce or eliminate surplus; verifying the title record before the hearing helps avoid delays.
• Service and answer traps: In special proceedings, initial petitions require summons and Rule 4 service; respondents have a short (often 10-day) answer window. Improper service can delay distribution.
• Disputed entitlement: If factual disputes or equitable defenses arise, the clerk may be required to transfer the matter to Superior Court, which can extend the timeline.

Talk to a Surplus Funds Attorney

If you’re dealing with a surplus funds hearing and want to understand how unpaid property taxes and other liens affect your recovery, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at 919-341-7055.

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.