Chapter 9 bankruptcy is specifically structured to address the needs of financially distressed municipalities, which can include a broad range of government entities such as:
- Taxing districts
- School districts
Chapter 9 allows these entities to reorganize their debts, extend repayment timelines, reduce the principal / interest, or obtain refinancing. In order to qualify for filing, distressed municipalities must meet four additional requirements:
- It must be legally authorized to file for Chapter 9
- It must be insolvent
- It must want to adjust its debts
- The majority of certain creditor types must agree to the filing
Although uncommon, the Chapter 9 bankruptcies that occur tend to make headlines. When Detroit, Michigan, filed in 2013, it gained national attention. So did the respective filings of San Bernardino County, California in 2012 and Central Falls, Rhode Island in 2011.
The filing process
Like individuals, municipalities must prepare and file all required paperwork with the bankruptcy court. Some states have certain requirements, such as attempting to negotiate with creditors prior to filing that must be satisfied beforehand. If the municipality does not follow all necessary steps, then it may end up having to defend objections to the filing. The court may also decide that the filing is improper if it determines that the municipality is not actually insolvent or alternatives to bankruptcy exist.
Unlike individual debtors in a Chapter 7 case, creditors cannot generally compel a municipality to liquidate its assets. The 10th Amendment specifically indicates that the state holds any powers not defined in the Constitution. Municipalities are under state jurisdiction, and bankruptcy is not part of the constitution, so federal courts cannot compel a municipality to liquidate. This means that a city can’t, for example, be ordered to sell one of its public parks to pay off creditors, although the city can do so of its own accord.
Because Chapter 9 cases can be complicated and political in scope, the chief judge of the Court of Appeals in the bankruptcy court’s location must select the judge who will hear the case. With other chapters, the judge is chosen by the clerk of the court.
As with Chapters 7 and 13 filings, once a Chapter 9 reorganization is accepted, an automatic stay is triggered, prohibiting all further collection efforts against the municipality.
Chapter 9 discharge
A municipality is discharged from bankruptcy after its debt reorganization plan is confirmed and it deposits the necessary money or property with the court.
Chapter 9 bankruptcy is one of the most complex bankruptcy chapters. The law treats it differently, and not all bankruptcy lawyers are involved in such cases, but it allows distressed municipalities to deal with their debts in the most productive way possible.
If you are considering filing for personal bankruptcy, then contact the law offices of Jayson Lutzky, P.C. Bankruptcy offers debtors the opportunity for a fresh financial start. Mr. Lutzky offers free in-person initial consultations and his office can be reached at 718-329-9500. Visit www.MyNewYorkCityLawyer.com for more.