{"id":286893,"date":"2021-01-27T09:10:08","date_gmt":"2021-01-27T14:10:08","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/bankruptcy\/business-bankruptcy\/chapter-9-bankruptcy.html"},"modified":"2024-06-07T10:36:51","modified_gmt":"2024-06-07T15:36:51","slug":"chapter-9-bankruptcy","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/bankruptcy\/business-bankruptcy\/chapter-9-bankruptcy.html","title":{"rendered":"Chapter 9 Bankruptcy"},"content":{"rendered":"\n
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Chapter 9 Bankruptcy<\/h1>\n
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\n By Amy Vandervort-Clark, J.D.<\/a> | Legally reviewed by Susan Mills Richmond, Esq.<\/a>\n | Last updated\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

The first Chapter 9, municipal bankruptcy, became law in 1934 amid the Great Depression. The stock market crash wiped out banks, individuals, and employers. Counties, cities, towns, and school districts struggled. Chapter 9 bankruptcy gave financially distressed municipalities a way to reduce their debts.<\/p>\r\n

Municipalities typically raise funds through the sale of municipal bonds. While the federal government can print more money, distressed municipalities or cities that run out of money may have to file for Chapter 9 or municipal bankruptcy.<\/p>\r\n

This article covers the basics of municipal bankruptcy and what it means for ordinary people, particularly those dependent on certain public services and public employees who risk losing at least some of their pension.<\/p>\r\n

What Is Chapter 9 Bankruptcy?<\/h2>\r\n

Chapter 9 is a section of the federal bankruptcy code reserved for municipalities. When a local municipality runs out of money, it can file for Chapter 9 bankruptcy<\/a> reorganization to keep operating key public services. Chapter 9 allows the city to continue functioning while restructuring its debts and finances.<\/p>\r\n

Filing for Chapter 9 bankruptcy is a serious decision for a municipality. The bankruptcy process can last from a few months to many years, depending on the complexity of the case and the amount of debt. Bankruptcy may damage the municipality’s reputation. Its employees risk losing essential benefits, like cuts in salary, pension deficits, and loss of benefits. Attracting new revenue streams can take time and effort. As a result, people may move away or avoid the community, making recovery difficult.<\/p>\r\n

Chapter 9 Basics<\/h2>\r\n

An entity must be insolvent to qualify for Chapter 9 bankruptcy reorganization<\/a>. Bankruptcy law defines being insolvent as the municipality "generally not paying municipal debts" or being "unable to pay its debts as they become due." A bankruptcy judge can decide which cases fulfill the eligibility requirements.<\/p>\r\n

Municipalities generally need local government or state permission before filing a Chapter 9 bankruptcy case. Some state laws allow municipalities to file for bankruptcy protection on their own.<\/p>\r\n

Chapter 9 Compared to Chapter 13 Bankruptcy<\/h2>\r\n

Municipal bankruptcy is like Chapter 13<\/a> bankruptcy for people because it aims to protect a town from creditors while negotiating debts. The city must make a good-faith effort to settle its debt and be open to negotiation.<\/p>\r\n

One key difference from other types of bankruptcies is that a municipality can’t be forced into liquidation of its property. This would violate the 10th Amendment of the Constitution<\/a>. This means the bankruptcy court can’t compel a city to sell a public park or historical landmark, for example, to pay off creditors. A municipality may choose to do so to meet creditors’ demands.<\/p>\r\n

The municipality also does not need court approval to lease or sell its property while a Chapter 9 case is pending.<\/p>\r\n

Municipalities have considerable power to rewrite collective bargaining agreements. This power may affect the pensions and benefits of public employees. Unlike a Chapter 11 bankruptcy<\/a> filed by businesses, Chapter 9 allows municipalities to rework contractual obligations in retiree plans without much opposition.<\/p>\r\n

Municipal debtors also have the freedom to levy taxes, leverage property and real estate, and increase revenue as they see fit.<\/p>\r\n

Municipality Defined: Who Can File?<\/h2>\r\n

The Bankruptcy Code defines a municipality as a "political subdivision or public agency or instrumentality of a State." 11 U.S.C. \u00a7 101(40)<\/a>. Essentially, Chapter 9 relief is available to:<\/p>\r\n