Chapter 9 Bankruptcy is a legal process that allows cities and other municipalities to restructure their debts without selling assets. Chapter 9 of the Bankruptcy Code protects troubled municipalities from creditors as they restructure and renegotiate their debts. Chapter 9 bankruptcy allows financially distressed municipalities to restructure their debts and seek protection from creditors. Chapter 9 is similar to Chapter 13 on bankruptcy (declared by a family or individual) in that the purpose of Chapter 9 is to protect municipalities from creditors when negotiating debts.
Chapter 9 protects distressed municipalities from their creditors by enabling them to create plans to reorganize their debts. Under chapter 9, a bankrupt municipality must submit a plan to repay the debt to creditors.
Chapter 9 of the Bankruptcy Code provides a legal mechanism through which municipalities are protected from creditors when they attempt to develop and negotiate a plan to resolve their debts. Chapter 9 bankruptcy, also known as “municipal bankruptcy,” allows a city, county, or other tax authority to seek protection from creditors to restructure or adjust the city’s debt obligations. Chapter 9 of the bankruptcy code, created by Congress in 1937 to allow municipalities to seek relief in the event of a financial crisis, is designed to ensure that essential government functions can continue while politicians restructure their debts. Chapter 9 differs from other parts of the federal bankruptcy code, such as Chapters 11 and 13, which typically provide court orders for businesses and individuals, respectively, that need funds. Only municipalities, not states, can apply for Chapter 9.
Although states are not eligible for bankruptcy protection, municipalities in some states may initiate proceedings under Chapter 9 of the US Bankruptcy Code, the US Bankruptcy Code. The Bankruptcy Code imposes restrictions on this power in connection with the hypotheses of Chapter 9 since municipalities are single entities that enjoy constitutional protection. Municipalities also need permission from local governments before they can file for Chapter 9 bankruptcy, although some state laws allow municipalities to file for bankruptcy protection on their own. The municipality must be willing to make a deposit; Chapter 9 is voluntary, so the municipality cannot be forced into bankruptcy.
If a municipality is unable to apply for Chapter 9, it may need an out-of-court restructuring such as debt refinancing or renewals, takeover bids or swaps, or other negotiated solutions. However, an experienced bankruptcy counselor can defend against such problems and demonstrate that municipalities are eligible for Chapter 9 protection and relief. Instead, municipalities seek relief under Chapter 9, a rarely used chapter that has been less than 700 cases filed. 9 cases are rare, a large municipal filing can – like the 1994 filing in Orange County, California – result in multi-million dollar municipal debt.
Since 2000, a total of 171 municipal governments have filed for Chapter 9 protection, with the largest number being filed in 2012 with 20 municipal bankruptcies. As described above, only about 560 municipalities have ever filed for Chapter 9 bankruptcy protection, and the vast majority of these were relatively small municipal facilities such as irrigation districts, utility districts, waste disposal districts, and health districts or hospitals. Cities, counties, municipalities, school districts, beautification districts, and other tax-funded entities such as bridges, highways, and gas services are eligible for Chapter 9 bankruptcy protection.
To be eligible for Chapter 9 protection, an insolvent municipality must apply in good faith for such protection. Applicable state law should be carefully considered by both creditors and municipalities when considering whether a municipality can apply for Chapter 9 protection. Although Chapter 9 is similar to other chapters in some respects, it differs significantly in that there is no provision in the revised municipal bankruptcy law. to liquidate the assets of the municipality and distribute the proceeds to creditors.
Section 109(c) of the United States Bankruptcy Code provides that a municipality may be indebted in a Chapter 9 bankruptcy case only if the municipality is specifically authorized to be indebted under state law or by a government official or licensed entity. authorize the municipality to be a debtor. If the settlement plan is not approved, the bankruptcy court may terminate the Part 9 case, thereby depriving the Part 9 debtor of the protection of the Bankruptcy Code. While the municipality is no longer required to file an adjustment plan with the bankruptcy filing, it must demonstrate a willingness to implement the adjustment plan rather than filing a chapter 9 return in an attempt to avoid or delay payments to its bankruptcy creditors. Before filing for bankruptcy, some states require municipalities to engage in pre-bankruptcy activities, such as trying to negotiate with creditors.
Just as a person filing for bankruptcy can continue to work while their bankruptcy continues, municipalities that file Chapter 9 claims continue to perform essential government functions during this debt restructuring period. Under Chapter 9 bankruptcy, municipalities are required to develop their own debt restructuring plans, and the courts approve or reject them with the participation of other stakeholders. Bankruptcy is a last resort, but two key benefits are time and legal protection. Unlike Chapter 11 bankruptcy (usually filed by businesses), Chapter 9 allows municipalities to efficiently process contractual obligations into retirement plans without much resistance. Their debt restructuring plans could also stop the lawsuits that could arise if the municipality defaults on its debts. Local leaders cringe at the thought of failure, and for good reason. The announcement in Chapter 9 immediately raises the likelihood of a credit downgrade and therefore an increased financial burden on the government in the future.« Back to Glossary