New York City officials are finalizing plans to replace a controversial debt collection system by the end of the current fiscal year as unpaid property taxes continue to rise, according to the city’s finance commissioner.

As policymakers negotiate a new plan, advocacy groups are sounding off about the old policy’s impact on low-income homeowners and tenants of absentee landlords, with the goal of shaping a more equitable tax lien policy. Under the previous program, which ended in 2021, the city offloaded liens to a trust that then hired a private company to collect the debts, impose fees and even foreclose on properties.

The finalization of the new debt collection proposal comes as two new reports released this week show how problems stemming from the city’s tax lien sale put low-income New Yorkers at risk of foreclosure, deed theft and hazardous living conditions, especially in communities of color.

“We can do better,” said Christie Peale, the executive director of Center for NYC Neighborhoods, which assists homeowners and analyzed the 2021 tax lien sale. “We have the knowledge to get upstream, to get to people before their financial situation gets so bad that the city thinks they have to use a strong arm tactic like the tax lien sale.”

The Center for NYC Neighborhoods report found that roughly 57% of the 1,499 small properties with liens sold in 2021 were located in areas where non-white residents made up at least half the population, including predominantly Black sections of southeast Queens and central Brooklyn. Homes in areas with a higher concentration of older adults and median incomes below $75,000 a year were also more likely to appear in the sale, according to the review, which focused on properties with four or fewer units, condos and co-ops.

The analysis found that the city often failed to help low- and middle-income homeowners avoid the tax lien sale or notify them of available relief programs, like income-based repayment plans or waivers for seniors.

A property tax system considered unfair by most lawmakers — including Mayor Eric Adams — only compounds the problem, Peale said.

The organization is urging policymakers to exclude small homes, known as “tax class 1 properties,” from the lien sale altogether because the system leads to foreclosure, financial disaster and scams — with little payoff for the city. The organization found that small properties made up just 21% of the total lien sale value in 2021.

At the very least, Peale said, the city should stop publishing the specific addresses of properties in the lien sale because the list alerts scammers and speculators to owners’ financial distress.

“It just kind of puts a big neon sign above your house saying, ‘This is a vulnerable homeowner,’” Peale said.

City councilmembers will eventually vote on the next lien sale proposal and say they are also taking into account the effects of the sale on small homeowners.

A spokesperson for Council Speaker Adrienne Adams, who introduced legislation to authorize the last tax lien sale in 2021, said the Council “is committed to enacting solutions that protect homeowners, especially seniors, veterans and those in communities of color, who too often have been placed in jeopardy of losing their homes and the equity they have built up over generations.”

Another report released on Thursday by the organization East New York Community Land Trust accuses the city of forfeiting its ability to hold absentee landlords accountable for poor conditions in their buildings by selling off their leverage.

At least 85% of units in properties subject to the lien sale are rentals, according to the review of the last four sales. Those properties have nearly seven times more housing code violations than properties without liens up for sale, according to the report.

“People are living in horrible conditions, ceilings are falling in, water danger is all over the place, people don’t have heat or hot water,” said researcher Jakob Kendall Schneider, who completed the analysis. “The city touts it as an enforcement mechanism, but it’s not really operating that way. It appears to be a way for the city to clean its hands of a significant amount of debt they don’t have to keep on their books.”

In an interview with Gothamist, Department of Finance Commissioner Preston Niblack acknowledged the problems cited by the two groups, but said the city is losing out on property tax revenue without the lien sale in place.

“We have to have an enforcement tool,” Niblack said. “The consequences of non-payment now are that we’re going to continue to lose money to, very often, the people who could pay.”

Niblack estimated that the amount of unpaid taxes will exceed $800 million the current fiscal year, up from around $700 million last year. Before the pandemic, the city failed to collect about $350 million in unpaid taxes each year, he said.

During a Council hearing last month, Niblack said the citywide delinquency rate reached 3.4% this year.

He said he hopes the new program will be introduced by the end of June and that it allows the city to better distinguish homeowners facing financial problems from people simply skipping out on the bill.

“The ideal replacement would balance the need to have an enforcement mechanism, the need to have consequences for not paying your taxes, with the recognition that there is a need for a lot more attention to people and help for people who are struggling to pay their property taxes,” he said.

Niblack also dismissed the idea of carving out small homes from the sale. Instead, he said, the Department of Finance should “really do a lot more intensive outreach, especially to vulnerable homeowners, in order to make sure that we are reaching people and making them aware.”

And he said the Department of Finance shouldn’t be responsible for holding landlords accountable for bad conditions in their buildings. Instead, he said, officials are considering reviving a program that allows the city to foreclose on apartment buildings with unpaid taxes and turning them over to nonprofit groups.

Property tax revenue is crucial for municipal operations. New York City estimates it will collect around $32.7 billion in property taxes in the upcoming fiscal year, about 30% of the total budget, according to the city’s January financial plan.

“We have a pretty large delinquency problem this year,” he said. “I don’t want to see it continue to grow next year.”