Chapter 9 Bankruptcy

Learn about Chapter 9: Municipality Bankruptcy.

by: , J.D.

Chapter 9 bankruptcy is a type of reorganization bankruptcy available to municipalities. Through Chapter 9, cities, towns, counties, and other public districts get protection from creditors while they pay back debt through a confirmed payment plan. Chapter 9 bankruptcy is rare -- only 640 municipalities have used it since 1937. However, in recent years with the financial crisis, it has been used more.

Who Can File for Chapter 9 Bankruptcy?

Chapter 9 bankruptcy relief is only available to municipalities. A municipality includes:

  • cities (the largest city to file for Chapter 9 was Detroit, Michigan in 2013)
  • counties (famous exemples include Orange County, California in 1994 and Jefferson County, Alabama in 2011)
  • villages
  • townships
  • school districts (such as the San Jose Unified School District in 1983)
  • public improvement districts, and
  • highway, bridge, and gas authorities.

What Happens in a Chapter 9 Bankruptcy?

In Chapter 9, the municipality develops a plan to reorganize its debt and repay creditors (often at a discount). Usually, the municipality does this through reducing principal and interest that it owes on debts, getting an extension of time to repay debts, and refinancing debt. Under Chapter 9 bankruptyc, the court does not liquidate any assets. At the end of the bankruptcy, the municipality recieves a discharge of certain debts.

How Does a Chapter 9 Bankruptcy Start?

In Chapter 9, the municipality files a petition with a list of its creditors. The Chief Judge of the Court of Appeals in the appropriate district appoints a bankruptcy judge. In addition, a creditors committee is formed.

In 26 states, however, the legislature must first enact a statute to authorize the initation of the bankruptcy before the municipality can file a petition.

The Automatic Stay

As in Chapter 7, 13, and 11 bankruptcy, the automatic stay also protects the municipality in a Chapter 9 bankruptcy. Under the automatic stay, the municipality's cerditors must stop all collection efforts. 

Chapter 9 Bankruptcies in Recent Years

Because of the recent financial crisis, there have been several high profile Chapter 9 bankruptcies in the past few years. Examples include:

  • Vallejo, California in 2010
  • Jefferson County, Alabama in 2011
  • Stockton, California in 2012
  • Mammoth Lakes, California in 2012
  • San Bernadino County, California in 2012
  • Central Falls, Rhode Island in 2011, and
  • Detroit, Michigan in 2013.

(Learn about the two most popular types of consumer bankruptcy: Chapter 7 Bankruptcy and Chapter 13 bankruptcy.)

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