Newly proposed state legislation would limit the profits that private companies make by buying tax liens from cash-strapped municipalities and foreclosing on homes if tax debts go unpaid.

The bill, versions of which were filed Jan. 16 in the Massachusetts House and Senate, would restrict financial gains made by third-party investment firms who are increasingly buying municipal debts and seeking to foreclose on homeowners. Instead, any proceeds from a sale would go to the property owner and town, while third parties would be allowed smaller profits on interest and fees.

The legislation, among other things, would require companies to more clearly explain to delinquent homeowners how their tax debts could lead to a property seizure; remove the penalty of arrest for tax delinquency; require companies that buy liens to be licensed by the state as debt collectors; and make it easier for towns and cities to help troubled residents – especially the elderly and disabled – pay what they owe.

If approved, the legislation would make Massachusetts a leader on the tax lien issue that has affected struggling homeowners nationwide, said John Rao, a staff attorney with the Boston-based National Consumer Law Center.

“Any attempt to improve the tax sale laws is a wonderful thing,’’ said Rao. “So few states have addressed this.”

Tax liens in Mass. between 2010 and 2014 (click for details)
Tax liens in Mass. between 2010 and 2014 (click for details)

The legislation comes two months after a New England Center for Investigative Reporting project found that a growing number of Massachusetts cities and towns are turning to private firms to pursue property owners who are delinquent on taxes. The practice concerns consumer advocates, who say vulnerable residents are being hit with astronomical fees and are sometimes losing their homes in the process.

READ MORE: Homeowners sold out by cities? Investors buy tax liens and foreclose

Sen. Sal DiDomenico, a Democrat from Everett, said he filed the bill to help low-income constituents statewide, many of whom are shocked to find that a delinquent tax bill of as little as a few hundred dollars could lead to the loss of their homes or land.

DiDomenico said he’d prefer cities and towns to keep the debt-collecting process in house. Some municipalities, like Boston, Attleboro and Norton, said they don’t sell tax liens to private companies, partly because they want to maintain control of the fate of troubled homes and because they believe they have more incentive to help at-risk homeowners than for-profit investors do.

“You do not expect to have a tax lien be the main reason you get foreclosed upon,’’ DiDomenico said. “They have to make the paperwork clearer.”

The House bill was filed by Rep. John J. Mahoney, a Worcester Democrat. But exact language is still being hammered out, a legislative spokesman said.

READ MORE: Greater Boston Legal Services’ rundown of the proposed legislation

The recent increase in tax lien sales has been seen by some cities and towns as an expedient way to unload unpaid debts and garner quick access to cash to pay for streets, roads, schools and emergency services. The process is made possible by a 1996 state law that allows municipalities to sell delinquent tax liens to third-party companies — individually or in bulk.

Under current law, firms are permitted to impose 16 percent interest on debts until they are paid. If residents fail to respond, companies can file a complaint in Massachusetts Land Court to foreclose on a property and sometimes realize a huge profit.

The effects of these sales are evident in Massachusetts Land Court where the New England Center found a handful of private companies filed more than 1,100 cases since 2012 seeking to foreclose on delinquent homeowners. While the majority of owners turn up to pay their delinquent taxes, some end up losing their homes or land for original debts that can be as small as a few hundred dollars, the center found.

The legislation will likely get push back from towns and cities attempting to increase municipal coffers by selling debts to third parties – a process used in 28 states. The Washington, D.C.-based National Tax Lien Association said that Massachusetts already leads the nation in providing protections for delinquent homeowners and defended tax lien sales as a way to ensure municipal funding.

The association said homeowners are protected by being given ample notice of unpaid taxes and by the opportunity to stop the foreclosure process by paying their taxes and interest fees during the court process.

“Massachusetts’ current protections for tax lien collection are among the highest in the country – the gold standard – a leader in providing due process and procedural safeguards to homeowners,” said Brad Westover, executive director of the association.

But Todd Kaplan, senior attorney for the consumer rights unit at Greater Boston Legal Services, said his nonprofit helped draft the new legislation because the current system – set up to help cities better collect taxes – has ended up being an “investment scheme” for private companies.

“Why should the investor get the windfall? It doesn’t make any sense,’’ said Kaplan. “There is now a much greater awareness that the current scheme doesn’t make sense.”