Chapter 9 of the US Bankruptcy Code provides exclusive remedy for financially troubled municipalities to restructure their debts. The Code had defined a municipality as ““political subdivision or public agency or instrumentality of a State.” As such no creditor can force a municipality to be liquidated.
The bankruptcy procedure begins when a municipality files a petition under Chapter 9. Unlike other chapters, a Chapter 9 bankruptcy judge is appointed by the chief judge of the Court of Appeals of the place where the bankruptcy court is located. Pursuant to Section 923 of the Bankruptcy Code, due notice of the case should be provided. Section 923 of Chapter 9 states that “There shall be given notice of the commencement of a case under this chapter, notice of an order for relief under this chapter, and notice of the dismissal of a case under this chapter.”
Accordingly, the notice should be published at least once a week for three successive weeks in at least one newspaper of general circulation published within the district in which the case is commenced. The same notice should also be published in another newspaper that has general among bond dealers and bondholders as designated by the court. Such notice shall also be published at least once a week for three successive weeks in at least one newspaper of general circulation published within the district in which the case is commenced, and in such other newspaper having a general circulation among bond dealers and bondholders as the court designates. Usually, an order is entered by the court designating who is to give and receive notice by mail and identifying the newspapers in which the additional notice is to be published.
A municipality is considered insolvent if it is generally not paying its debts as they become due unless such debts are the subject of bona fide dispute, or unable to pay its debts as they become due. The bankruptcy petition filed under Chapter 9 is open to objections. Primarily, objections are about the fact whether the municipality filed the petition in good faith; whether the municipality had conducted proper negotiations, and whether it has legal authority to file under Chapter 9. If any of the above objections are evidentially proved, the bankruptcy court will dismiss the municipality’s petition. If the petition is approved, the court is bound to order a relief allowing the case to proceed under chapter 9.
Due to the complexity of the cases, its size, the range of parties involved and the laws make Chapter 9 bankruptcy as one of the most complex and rarest forms of bankruptcy. 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. The Bankruptcy Code imposes limits on Chapter 9 creditors because municipalities are unique entities. Chapter 9 creates a debt resolution plan between the municipality and its creditors, thus providing financial protection.