Managing Pre-Petition and Post-Petition Bankruptcy Debts owed to Municipalities and School Districts

Many municipalities express confusion with regard to their ability to collect debt owed by a property owner who has filed for bankruptcy protection. All amounts that are owed to the municipality prior to the date of the bankruptcy filing constitute “pre-petition” debt and the municipality is prohibited from collecting pre-petition debt during the pendency of the bankruptcy case without specific authorization from the bankruptcy court. Continuing to collect on pre-petition debt after notice of the bankruptcy filing is strictly prohibited under bankruptcy law and may subject the municipality to monetary sanctions.

Municipalities are often surprised to find that despite the bankruptcy, they are still permitted to collect on obligations that have accrued after the bankruptcy is filed.  The collection of this “post-petition” debt is important not only to the municipality, but also to the bankruptcy debtor, as the municipality’s failure to collect may artificially place debtors in a comfort zone where they believe that all financial obligations owed to the municipality are being paid through the bankruptcy case.  The failure to collect post-petition obligations may cause the accumulation of numerous years of debt while the bankruptcy is proceeding.  A notice to the debtor that four years of back taxes and municipal obligation are owed after a bankruptcy discharge is entered is often a very unwelcome surprise and may force the debtor right bank into bankruptcy.

By continuing to collect on post-petition debt during the term of the bankruptcy, municipalities should bring in more revenue, while keeping the debtor aware that those debts are owed. One caveat in the collection of post-petition debt is that a creditor may not take action against the debtor’s property without the prior consent of the bankruptcy court. Should your municipality have any questions about bankruptcy, Portnoff’s bankruptcy team of attorneys Kevin Buraks and Jim Wood is available to analyze your current bankruptcy practices and provide an educational session for your staff.