Lesson 11: Chapter 9: Municipalities

Discover the nuts and bolts of municipal bankruptcy with a dash of humor. Let’s dive in!

In this lesson, we will explore Chapter 9 of the Bankruptcy Code, which applies specifically to municipalities. This chapter provides for the reorganization of municipalities, including cities and towns, as well as certain other governmental entities.

What is Chapter 9 Bankruptcy?

Chapter 9 Bankruptcy allows municipalities to reorganize their debts. Unlike other types of bankruptcy, Chapter 9 does not allow for liquidation. The goal is to provide a financially distressed municipality protection from creditors while it develops and negotiates a plan for adjusting its debts.

Important: Only municipalities and their instrumentalities are eligible for relief under Chapter 9. This includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.

Eligibility Requirements

To qualify for Chapter 9, a municipality must meet several requirements:

Be a municipality.
Be specifically authorized to be a debtor by the state.
Be insolvent.
Desire to effect a plan to adjust its debts.
Either:
- Have obtained agreement from creditors holding a majority of claims in each class that will be impaired under the plan,
- Have negotiated in good faith with creditors but failed to obtain the agreement,
- Be unable to negotiate with creditors because such negotiation is impractical, or
- Reasonably believe that a creditor may attempt to obtain a preference.

Filing for Chapter 9

The process begins with the filing of a petition. Below is an example of a simple HTML form that could be used to simulate the filing process:


        
            Municipality Name:
            
            
            State Authorization:
            
            
            Insolvency Proof:

Plan of Adjustment

The debtor municipality will propose a plan to adjust its debts. The plan must be confirmed by the court. Below is a diagram showing the process flow for the plan of adjustment:

graph TD; A["Municipality Files Chapter 9"] --> B["Court Issues Automatic Stay"]; B --> C["Municipality Proposes Plan"]; C --> D["Creditors Vote on Plan"]; D --> E["Court Confirms Plan"]; E --> F["Plan Implemented"];

Benefits of Chapter 9

Chapter 9 provides several benefits, including:

Automatic stay of actions against the municipality.
The ability to reject, assume, or assign executory contracts and leases.
Flexibility in proposing a plan of adjustment that may include refinancing, debt extension, or debt reduction.

Notable Chapter 9 Cases

Several high-profile Chapter 9 cases have shaped the application of this chapter, including: