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A new law to end so-called “home equity theft” in Massachusetts is on its way to the governor’s desk.

The Legislature approved a compromise budget Thursday night that included an amendment filed by Sen. Mark Montigny to reform the state’s tax foreclosure process.

Current state law allows municipalities and private tax collectors to keep all of the proceeds in tax foreclosure sales, no matter how little the homeowner owed — a practice critics dubbed “home equity theft.” The U.S. Supreme Court ruled in May 2023 that a similar law in Minnesota was unconstitutional, putting more pressure on Massachusetts lawmakers to rewrite its law.

The budget amendment would require tax collectors to return excess home equity to the former property owner in foreclosures. It also updates the state’s tax law in a few other ways to make it easier for homeowners to avoid tax foreclosure before it happens. The bill is now waiting for Gov. Maura Healey’s approval.

“Too many homeowners across Massachusetts have been robbed of their hard-earned equity by greedy profiteers,” Montigny said in a press release. “The Senate took the lead on ending this injustice in Massachusetts and I am proud to ensure that we’ve taken this opportunity to provide strong protections for struggling homeowners who are often facing incredible challenges in their lives.”

The state senator once again called on municipalities to return excess equity they had taken through tax foreclosures.

Montigny’s amendment would update the notices sent to homeowners before foreclosures, replacing the legalese with plain language. It would also cut the interest rate on property tax debt from 16% to 8%.

The amendment would relax the limits on tax repayment plans, giving tax collectors more latitude to work with taxpayers who have fallen behind. It would increase the maximum length of these plans from five years to 10 years, reduce the minimum down payment from 25% to 10%, and allow municipalities to waive all of the accrued interest.

A 2023 New Bedford Light investigation found that dozens of New Bedford property owners have lost their houses — and all the remaining equity in them — over tax debts that were just a fraction of the property’s value. For years, the city sold tax debts to Tallage, a private company that foreclosed on the property owners and reaped the proceeds.

The property owners included a grandmother who had spent her life savings to buy a $168,500 duplex in the South End — she lost her home over a tax debt of $9,516. In some cases, Tallage foreclosed on properties to collect debts under $1,000. The company then sold those properties for as much as $212,000. The new foreclosure law would apply to companies like Tallage.

Last year’s U.S. Supreme Court ruling sent Massachusetts into a state of legal limbo. New Bedford’s tax collector temporarily stopped filing new tax foreclosure cases until the state’s law was clarified, The Light reported earlier this year.

Some former homeowners have sued in recent years to reclaim their lost equity. Two cases brought by people who lost New Bedford properties are pending in federal court. Both are currently in settlement negotiations, court records show.

Email Grace Ferguson at gferguson@newbedfordlight.org