Bankruptcy Commission Recommends Changes to Municipal Law

By Hendrich, Nikki | Nation's Cities Weekly, October 27, 1997 | Go to article overview
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Bankruptcy Commission Recommends Changes to Municipal Law


Hendrich, Nikki, Nation's Cities Weekly


The National Bankruptcy Review Commission submitted recommendations to change federal laws in ways which could affect municipal budgets and municipal rights in the event of facing a financial shortfall. The main changes recommended by the nine members would favor individual debtors filing for federal bankruptcy protection on issues like credit card payments, lien repayments, and student loans. Changes to federal municipal bankruptcy provisions (so-called chapter 9 cases) took up only a small portion of the 1,300 page report and recommendations.

The Commission conducted a two-year study prior to submitting these recommendations to President Clinton, Congress, and the Supreme Court. There are a few changes in the final report that pertain to Chapter 9 bankruptcy cases. Chapter 9 cases are those bankruptcy cases that are filed by municipalities when they can not cover their expences and need to have assistance (much like an individual filing for the more common Chapter 7 or 13). Chapter 9 cases are very rare, making them harder to know how to regulate.

Some of the changes made in the Recommendations were:

* to alter the way petitions for bankruptcy were ordered,

* change the way bankruptcy judges are appointed to municipal cases, and, most importantly,

* change the priority of revenue bonds.

Currently, only revenue bonds where a bond is secured by a revenue fee, such as water or sewer fees or charges, are given protection during a Chapter 9 bankruptcy, and other general obligation bonds are not given that protection. The Commission has suggested that Congress make all tax-exempt obligations sold in the municipal marketplace have the same protection when a municipality files for Chapter 9 protection from creditors to reorganize finances.

Sen. Charles Grassley (R-Iowa) who conducted the hearings for the Senate Judiciary Committee had already introduced legislation to amend federal bankruptcy laws, the Investment and Education Act of 1997. The Grassley bill is likely to be the foundation for action in Congress next year on changes to federal bankruptcy laws affecting cities and towns, including a key change which could have a significant benefit for cities and towns.

The Grassley bill would eliminate bankruptcy judges' ability to overturn property tax valuation decisions and reduce property tax liabilities, ultimately mandating local governments to refund property taxes already received. Under current federal law, when assessed values and taxes are reduced as far back as ten years for a consumer who has filed for bankruptcy, cities are sometimes required by federal courts to refund ten years' worth of taxes to the bankrupt estate. Since the money was counted at the time of payment, a rebate can cause a significant loss to the municipality.

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