Powers of the Debtor

The  court is not actively involved in the conduct of a municipal bankruptcy case while the debtor’s financial affairs are undergoing reorganization  because of the statutory limitations placed upon the power of the court in a municipal debt adjustment proceeding.

Usually, the municipal debtor has broad powers to use its property, raise taxes, and make expenditures as it sees fit.  A municipal debtor can also adjust burdensome non-debt contractual relationships under the power to reject executory contracts and unexpired leases.  However, this is subject to court approval. A chapter 9 debtor possesses the same avoidance powers as debtors who file petitions under other chapters of the Bankruptcy Code. Municipalities can also reject collective bargaining agreements and retiree benefit plans without going through the usual procedures required in Chapter 11 cases.

The municipality has the power to continue borrowing money so that it can finance its operations.  It can borrow money during a Chapter 9 case as an administrative expense.   Since the borrowing is classified as an administrative expense, creditors that lend money to the municipality during the bankruptcy are given the highest priority for repayment.   It has the same power to obtain credit as it does outside of bankruptcy. The court does not have any supervisory authority over the amount of debt the municipality incurs in its operation. The municipality can also employ professionals without court approval and the professional fees incurred are reviewed only within the context of plan confirmation.  The ability to borrow money is important to the survival of a municipality that has exhausted all other resources.

There is no liquidation under Chapter 9, since a municipality provides necessary services and is a creation of the state, and, thus, protected under the state’s sovereignty.


Inside Powers of the Debtor