by: Kathleen Michon, 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.
Chapter 9 bankruptcy relief is only available to municipalities. A municipality includes:
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.
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.
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.
Because of the recent financial crisis, there have been several high profile Chapter 9 bankruptcies in the past few years. Examples include: