Municipality Bankruptcy

Chapter 9 bankruptcy is exclusively available for municipalities in financial crisis to restructure debts. It provides for reorganization of municipalities including cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts. The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.” Chapter 9 bankruptcy provides protection to financially troubled Municipalities from creditors by creating a debt resolution plan between the municipality and its creditors.

One of the major benefits of Chapter 9 bankruptcy is the Municipalities’ ability to re-write collective bargaining agreements. This is much greater than in a corporate Chapter 11 bankruptcy and can trump state labor protections, allowing cities to renegotiate unsustainable pension or other benefits packages. This negotiation will include reduction of outstanding debt or interest rate, extension of term of the loan and refinancing debts.

Chapter 9 bankruptcy is one of the most complex and rarest forms of bankruptcy. These cases are complex due to their size, the parties involved, and that the law treats these cases differently. In order to file for Chapter 9 bankruptcy, a municipality must be specifically authorized by law. It must be insolvent and have a desire to adjust its debts. The municipality should obtain evidence as to the attempts made to negotiate.

Creditors can in no way force the liquidation of a municipality’s assets. A municipality is defined by its state and is under state jurisdiction. According to the 10th Amendment, bankruptcy proceedings are not a part of the constitution, and therefore the federal courts cannot force a municipality to liquidate.

In some states, municipalities should engage in pre-bankruptcy activities, such as attempting to negotiate with creditors before filing bankruptcy petition. All necessary bankruptcy paperwork should be filed with the clerk of the bankruptcy court. If the municipality did not engage in pre-bankruptcy negotiations, the creditors may object to the bankruptcy petition. Immediately upon filing of bankruptcy petition, the automatic stay activates and all creditors are forbidden to initiate any action against the filing entity to collect on debts. The automatic stay clause also provides protection to the officers of the municipality.

In a Chapter 9 bankruptcy, the chief judge of the Court of Appeals of the place where the bankruptcy court is located will select the bankruptcy judge. This is because Chapter 9 cases can be very complex and may involve elements of politics. The Bankruptcy Code imposes limits on Chapter 9 creditors because municipalities are unique entities. The court will also have no power to convert the case into another type of bankruptcy or appoint a trustee.


Inside Municipality Bankruptcy