How Chapter 9 Bankruptcy Works

petition to file for Bankruptcy

Chapter 9 is in the federal bankruptcy code and is applicable to municipalities ONLY. The meaning of chapter 9 is stated as follows:

To provide a financially distressed municipality protection from the people it owes while it comes up with a plan for adjusting/reorganizing its debts (through negotiation) to pay off. Handling debts owed by a municipality happens by decreasing the amount of interest or principal, refinancing the owed money by getting another loan or extending the amount of time needed to pay debts.

A Short History of Chapter 9

During the Great Depression in 1934, the 1st ever municipal bankruptcy legislation passed (Pub. L. No. 251, 48 Stat. 798 (1934). This law was made with carefully not infringe upon the Tenth Amendment which is described as follows:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Since 1937, this law has been edited many times. It was created specifically for municipalities such as:

  • Cities
  • Towns
  • Villages
  • Townships
  • School districts
  • counties,
  • Tax districts
  • Municipal utilities

The purpose of this law is for resolving city/town debts. Because of Chapter 9, the assets of a municipality are not liquidated. In fact, chapter 9 rarely happens and there has been less than 620 times it has happened. That pales in comparison to the 418,000 under Chapter 13 and 12,000 bankruptcy filings under Chapter 11.

Who Can File for Chapter 9?

Chapter 9 is only available to municipalities to file for. A municipality is defined as follows:

A political subdivision or public agency or instrumentality of a State.

A municipality can encompass a long range of governmental entities. In terms of a municipalitie’s qualification for filing a chapter 9 bankruptcy, here are 4 requirements necessary to file:

  1. The municipality must be authorized to file for a Chapter 9 under state law
  2. It must be solvent
  3. It must have the inclination to fix its debts
  4. Agreement of creditors or evidence that it tried to negotiate

How Does a Chapter 9 Bankruptcy Begin

First off, the municipality must file a petition with a list of creditors. Then a bankruptcy judge is appointed as a result of The Chief Judge of the Court of Appeals call. However, there are 26 states that require the legislature to pass a statue to allow the start of the bankruptcy before the municipality can file a petition.

Examples of Chapter 9 Bankruptcies

  • 2013 in Detroit, Michigan
  • 2010 in Vallejo, California
  • 2012 in Stockton, California
  • 2011 in Central Falls, Rhode Island

Contact Shaw Defense today to speak with a Houston bankruptcy attorney about your case and review your options for getting out of debt.



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