Senate holds hearing on
bankruptcy bill

The financial impact of lost property tax revenues on education caused by bankruptcies was the focus of a recent congressional hearing.

Sen. Charles Grassley (R-Iowa), chairman of the Administrative Oversight and Courts Subcommittee, called the hearing to get reactions to draft legislation he will be introducing to amend two sections of the bankruptcy code affecting tax liens. The bill, the Investment In Education Act, will be cosponsored by Sen. Dick Durbin (D-Ill.).

"It seems that the bankruptcy code may be operating as a type of unfunded mandate, draining badly needed revenues from state and local treasuries," stated Grassley in his opening statement.

Sandy Hume, Boulder County (Colo.) treasurer, testified in support of the draft legislation on behalf of the National Association of County Treasurers and Finance Officers (NACTFO). He also presented a NACo resolution adopted last month at the Annual Conference calling for changes in the bankruptcy code.

St. Lucie County (Fla.) Tax Collector Dorothy Conrad cited a case in her county where a large developer declared bankruptcy and a judge lowered the taxes due on the property. The lost revenue affected 63 taxing authorities and caused a hardship for schools in the county.

Jayne Morrell, tax assessor/collector for the City of Dallas, Texas and the Dallas Independent School District, cited a loss in property tax revenues of $450,000 in six recent cases. The School District estimates that the revenues would have funded:

• 14 classroom teachers, or
• 230 campus computers, or
• $150 in additional school supplies for 3,000 teachers.

The Grassley-Durbin bill would amend 505 (A) and 724 (B) of the bankruptcy code. Section 505 (A) allows a bankruptcy judge to lower the assessed value of property and then lower the taxes owed to a county or city. The bill would only permit a reassessment if it is allowed by state law.

Section 724 (B) essentially sets out a distribution plan for paying administrative expenses and unsecured creditors. Tax liens are only paid after all of the unsecured creditors have been paid. In many cases, lawyer's fees and administrative costs use up the assets of the estate leaving no funds for unsecured creditors.

The Grassley-Durbin bill would remove property tax liens from Section 724 (B). The effect of the amendment would require payment of property taxes as part of the liquidation proceedings in bankruptcy cases.

The legislation will be introduced when Congress returns in September. Senators Grassley and Durbin are seeking cosponsors.