Bankruptcy Reform Plan Would Allow City Taxes to Be Recouped

Article excerpt

A priority on the Congressional radar-map for the second session of the 105th Congress could benefit the revenue streams into cities. The reform of the federal Bankruptcy Code could allow for amendments that ensure a higher priority in federal bankruptcy law for municipal items -- putting cities ahead of other holders of outstanding debts. The changes would allow cities to recover owed property taxes ahead of other debts. The overhaul of the bankruptcy code comes as a result of record numbers of bankruptcies being filed in the U.S. and a report outlining areas for reform by the National Bankruptcy Review Commission.

In the House, Rep. George Gekas (R-Pa.) has proposed the Bankruptcy Reform Act of 1998 (H.R. 3150). Gekas' proposed consumer bankruptcy system would be reformed to integrate a needs based bankruptcy program. Debtors would be subject to guidelines set in place by the bill that would emphasize taking personal responsibility and paying for debts, rather than resorting to Chapter 7 bankruptcy which would relieve the debts and place the burden on consumers and businesses.

The proposal also includes an education program to help debtors better manage their finances and makes states exemptions uniform, particularly regarding the value of a home that a debtor is free from having to surrender. Gekas's proposal also provides a safety net for extraordinary circumstances such as those suffering major life crises that reflect on financial matters, such as losing a job or extensive medical costs. Gekas' bill is co-sponsored by Rep. Bill McCollum (R-Fla.), Rick Boucher (D-Va.), and Jim Moran (D-Va.).

Investment in Education Act

In October 1997, the Senate unanimously approved the Investment in Education Act of 1997 (S. 1149) that would amend the federal bankruptcy code to increase local revenues derived from property tax hens or debtors who have filed for federal bankruptcy protection. The bill was introduced by Senator Grassley (R-Iowa) with the intentions that gains recovered from property taxes by those filing for bankruptcy would be carried over into local education programs. On the House side, Gekas integrated this proposal into his Bankruptcy Reform Act of 1998.

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 could aid local governments in recovering losses by giving fair access to assets of bankruptcy estates by preventing debtors from using the Bankruptcy Code to skirt the law. The Clinton Administration endorsed the Investment in Education Act and was active in suggesting the inclusion of language that protects children and spousal support in bankruptcy cases before payment of other debts is made.

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. …