Property Taxes Faring Well in Bankruptcy Bill

By Cormier, Kristin E. | Nation's Cities Weekly, April 27, 1998 | Go to article overview

Property Taxes Faring Well in Bankruptcy Bill


Cormier, Kristin E., Nation's Cities Weekly


The House Judiciary Subcommittee on Commercial and Administrative Law approved a bill last week that would aid cities in recovering bankruptcy filers' unpaid property taxes]. Subcommittee Chairman George W. Gekas (R-Pa.), sponsored the Bankruptcy Reform Act of 1998 (H.R. 3150) to overhaul the consumer and business sections of the federal Bankruptcy Code.

The reform of the federal Bankruptcy Code included in H.R. 3150 could allow for amendments that would recover property taxes ahead of other debts by those filing for bankruptcy.

This overhaul comes as a record numbers of bankruptcies being filed in the U.S. and coincides with a report outlining areas for reform by the National Bankruptcy Review Commission. The last overhaul of the Bankruptcy Code was in 1978.

Investment in Education Act Provisions

NLC was active in supporting amendments by Rep. Gekas that strengthened the Investment in Education provisions in title V of the bill. NLC's highest priority in terms of strengthening the Investment in Education provisions of H.R. 3150 is to revise the interest rate on ad valorem taxes to the local and state statutory rate. This provision would fix what some cities and towns call a "cram-down."

Bankruptcy filers who owe property taxes sometimes receive judgments which discount the percentage rate that bankruptcy filers owe by up to 10 percent on ad valorem taxes owed. This is a particular problem for New York City and Dallas, Tex. where local statutory percentage rates reach 16-18 percent and an IRS Code rate that applies could discount the rate to 8 or 9 percent.

Many local jurisdictions use revenues derived from property taxes or ad valorem taxes, and suffer when taxes are delinquent due to delays built into the bankruptcy code. This bill will aid local governments in recovering losses, by giving fair access to assets of bankruptcy estates and will prevent debtors from using the Bankruptcy Code to skirt the law.

The bill would also allow a bankruptcy court to reverse a property valuation decision only when a bankruptcy debtor has the right to challenge such a decision under state law. This would prevent long and drawn out legal battles over the assessment of property on which taxes are already due. The previous law could force towns to reduce assessed values and taxes as far back as ten years, and towns would had to refund ten years worth of taxes to a bankrupt estate, despite the fact that moneys have been paid to Boards of Education and spent for educational purposes.

The Bankruptcy Code applies in every state and territory of the United States and cities can face revenue shortfalls as a result of bankruptcy law. Senator Grassley, who introduced the Investment in Education Act in the Senate cites that about 15 percent of the education budget in the City of Houston is lost to bankruptcy. In Dallas, six cases of bankruptcy have accounted for $449,593 in lost revenue, according to Jayne Morrell, Tax Assessor / Collector for the City of Dallas. Grassley's office says virtually every state has experienced a revenue shortfall as a result of the way the law is written. Florida also has attributed losses to the law, because judges have ordered cities to pay large refunds of property taxes paid years earlier.

As the bill left committee, Rep. Gekas included language that would guarantee the holder of an unsecured claim for taxes to receive at a minimum, the federal short term rate as determined by the Internal Revenue Code rounded to the nearest full percent plus three percentage points. …

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Property Taxes Faring Well in Bankruptcy Bill
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