House Bankruptcy Bill Would Strengthen Local Tax Collection

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Action on bankruptcy bills in both the House and the Senate has sped up in the past two weeks. The most notable action was made in the House, where an amendment passed in the House Judiciary would prevent local statutory interest rates applied to unpaid ad valorem taxes from being discounted into the internal revenue code's prime rate. This would assist in preventing bankruptcy filers from abusing cities and towns to receive lower interest on property taxes.

Cities and towns should contact members of the House of Representatives and ask them to support the tax provisions in H.R. 3150. This would help cities receive a higher priority of payment and ensure that proper interest rates can be applied to unpaid property taxes.

Interest Rate Fix

The House Judiciary Committee approved a motion to report the Bankruptcy Reform Act of 1998 (H.R. 3150), sponsored by Rep. George Gekas (R-Pa.), to the House floor in an 18-10 vote on May 14. This bill would aid cities in recovering unpaid property taxes from bankruptcy filers, as well as to overhaul the consumer and business sections of the federal Bankruptcy Code. Gekas included tax provisions similar to the Investment in Education Act, which was passed by the Senate in fall 1997 in the hope of obtaining relief for localities as soon as possible.

Gekas offered an amendment that was unanimously supported by the committee that would clarify several of the provisions that NLC had concerns with. At the urging of NLC and other state and local organizations including the National Association of Attorneys General (NAAG), National Association of County Treasurers and Finance Officers, as well as representatives from the federal government, Gekas' amendment strengthened the tax provisions of the bill by clarifying the needs of state and local governments.

His amendment would fix the so called "cram down" of interest rates applied to unpaid ad valorem taxes by applying the state and local statutory rate instead of the I.R.S. rate.

Cities and towns are nonconsensual creditors, and are in unique situations with their constituents in terms of ad valorem taxes. In some cities and towns, the local interest rate accruing on unpaid taxes could be as high as 18 percent, which is double the I.R.S. statutory rate. This provision is significantly awarding cities the debts that are truly due to them, with no discounting and avoids treating bankruptcy filers who have not paid their property taxes to favorable treatment or "discounted loans." The amendment also recognized ad valorem taxes as secured claims.

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 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. The last overhaul of the Bankruptcy Code was in 1978.

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. …