Excess Proceeds After a Foreclosure or Tax Sale in Tennessee

When a property is sold to pay a debt, the sale price does not always match what was owed. Sometimes it brings in more. The difference is surplus, and in Tennessee it belongs to the people with a legal interest in the property, not to the lender or the county that ran the sale. The rules for getting it depend on what kind of sale it was.

Two kinds of sale, two sets of rules

• A mortgage foreclosure in Tennessee is usually a trustee's sale under a power of sale in a deed of trust, without a court case.
• A delinquent tax sale is ordered by a court in a lawsuit the county or city files to collect unpaid property taxes.

Mortgage foreclosure: the deed of trust and lien priority control

Tennessee's foreclosure statutes (Title 35, Chapter 5 of the Tennessee Code) cover notice, advertising, and how the sale is conducted, but they do not set out a formula for distributing surplus. The deed of trust and general lien-priority principles fill that gap. After the debt being foreclosed and the costs of sale are paid, the surplus generally goes to junior lienholders whose liens the sale cut off, such as a second mortgage or a judgment creditor, in order of priority, and then to the former owner.

When the trustee faces competing claims and cannot safely pay one side, it can deposit the money with the court and ask to be discharged, leaving the claimants to sort it out. That procedure is interpleader, under Tennessee Rule of Civil Procedure 22. It is often how foreclosure surplus disputes end up in chancery court.

Delinquent tax sales: claim it by motion

Tax-sale excess proceeds have a specific statute, Tenn. Code Ann. § 67-5-2702. The money is held by the clerk of the court that ordered the sale. After the order confirming the sale, any interested person may file a motion asking the court to pay out the excess proceeds. The motion has to be served on all interested persons at least 30 days before the hearing.

The court pays claims in this order:

1. the taxing entity, for any remaining or later taxes;
2. lienholders whose claims existed at the time of the tax sale, by priority;
3. lienholders whose claims arose after the sale;
4. the former owner, by their interest, but only if they were a defendant in the tax case or inherited from a defendant by will or intestacy.

Anything left is subject to the Uniform Unclaimed Property Act and can be turned over to the State Treasurer, who holds it for the owner rather than owning it. In Hamilton County v. Tax Year 2018 Delinquent Taxpayers (Tenn. Ct. App. 2024), a judgment lien that was valid at the time of the tax sale kept its priority over the former owner's heirs, even though the lien later lapsed.

Notice depends on the record. A person claiming an ownership interest who has not recorded their deed, an abstract of it, or an affidavit of heirship with the register of deeds more than 30 days before the hearing is not entitled to notice of the excess proceeds motion. Someone who had no notice through no fault of their own can sue whoever was paid in error, but that is a harder road than being at the hearing.

Surplus and the right to redeem

After a tax sale, the former owner usually has a period to redeem the property by paying what is owed plus interest. That period runs from the order confirming the sale, is never more than one year, and can be much shorter for property that was delinquent for a long time. The legislature also changed the redemption periods for sales confirmed on or after July 1, 2026, so the dates in a particular case matter.

Claiming excess proceeds and redeeming the property are different choices. Under § 67-5-2702, at the hearing on a motion for excess proceeds the court terminates any remaining redemption period for the person who filed it. Anyone who wants to keep the property should decide that before asking for the surplus.

Deadlines and unclaimed surplus

A tax-sale excess proceeds motion can be filed until the funds are actually forwarded to the state. The money is not treated as abandoned until all redemption and excess proceeds motions are resolved, or one year after the redemption period expires, whichever is later. Once surplus from either kind of sale reaches the Tennessee Treasury's unclaimed property program, it can still be claimed there.

Surplus finders

Former owners are often contacted by companies offering to recover excess proceeds for a percentage. The tax-sale statutes do not cap those fees. Even before the money is turned over, § 66-29-176 may require a fee agreement to be in writing, signed by the owner, and to state the value before and after the fee. Once the money has been turned over to the state's unclaimed property program, Tenn. Code Ann. § 66-29-176 limits finder agreements: they must be in writing and signed by the owner and must state the value of the property before and after the fee, and the fee is capped at 10 percent or $50, whichever is greater. An agreement made within two years after the property is delivered to the Treasurer is void. These limits do not apply to an owner's agreement with an attorney to pursue a claim for specific property held by the Treasurer, or to contest the Treasurer's denial of a claim.

Separately, when someone who acquired a redemption right by transfer moves to redeem, the court must deny the motion if the tax sale purchaser or another interested party objects and it appears the transferee is engaged in speculation or profiteering with that right. Speculation is presumed if the right was acquired for less than the tax sale price minus the amount needed to redeem (§ 67-5-2701). This rule covers redemption rights, not claims to excess proceeds. Before signing anything, it is worth knowing how much is on deposit and what claiming it directly would involve.

The constitutional backdrop

In Tyler v. Hennepin County (2023), the U.S. Supreme Court held that a homeowner had plausibly alleged a violation of the Takings Clause where the county sold her home for unpaid taxes and kept the surplus beyond the tax debt. The Court distinguished an earlier case in which the law gave owners a process to claim the surplus and the owners did not use it. Tennessee's process returns surplus through § 67-5-2702, but it pays only those who come forward and prove their interest.

Who is entitled to a particular surplus depends on the sale, the recorded liens, and family and probate facts. If you are a former owner, an heir, or a lienholder trying to recover excess proceeds in Middle Tennessee, my office can review where the money is and what a claim would require.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice about any specific sale, claim, or deadline.