Bankruptcy Bill Passes in House; Cities Receive Higher Priority in Recovery of Ad Valorem Taxes

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Cities recieve higher priority in recovery of ad valorem taxes

In a victory for many cities and towns, the House last week adopted bankruptcy reform legislation that would aid cities in recovering millions of dollars in unpaid property taxes from bankruptcy filers. The "Bankruptcy Reform Act of 1998 (H.R. 3150)" contains many provisions that would benefit municipalities.

The bill, which would overhaul the consumer and business sections of the federal Bankruptcy Code, passed in a 306-118 vote.

Rep. George Gekas (R-Pa.), Chair of the House Judiciary Subcommittee on Commercial and Administrative Law, incorporated key NLC-supported tax provisions similar to those which was passed by the Senate in fall 1997 in the hope of obtaining prompt relief for localities. Provisions in the bill would prevent local statutory interest rates applied to unpaid ad valorem taxes from being discounted down to Internal Revenue Code's prime rate. This would assist in preventing bankruptcy filers from forcing cities and towns to receive lower interest of property taxes and 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 as applied in a previous version of the bill.

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, were able to secure strong language from the House Judiciary Committee that would improve the "Investment in Education Act" with Gekas' support.

Cities and towns extend credit to properly owners in good faith because they are property owners and never assess their ability to pay property taxes. Cities and towns rely on the unique relationship with their constituents and expect payment on ad valorem taxes in exchange for services in cities and towns. In some cities and towns, the local interest rate accruing on unpaid taxes are higher than the I.R.S. statutory rate. The House bill would change current federal law to ensure better municipal ability and authority to enforce debts that are the due to them with no discounting. It would avoid treating bankruptcy filers who have not paid their property taxes to favorable treatment or "discounted loans". The bill also recognized ad valorem taxes as secured claims.

The reform of the federal Bankruptcy Code included in H.R. 3150 allows for recovery of 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 by the National Bankruptcy Review Commission. …