What is a Chapter 9 Bankruptcy?

It is well known that individuals and businesses can file for bankruptcy protection.  It is less well known that municipalities can also file bankruptcy.  Municipalities must file for protection under Chapter 9 of the Bankruptcy Code.  Municipal bankruptcies have become a bit more familiar to the general public in the past several years, with Detroit, Michigan and more locally, Jefferson County, Alabama, filing for protection under this section of the Code.

Chapter 9 Bankruptcy

Chapter 9 bankruptcy is limited to municipalities.  The term "municipality" is defined in the Bankruptcy Code as a "political subdivision or public agency or instrumentality of a State." 11 U.S.C. § 101(40).   This includes cities, counties, towns, and school districts.  It also includes organizations such as highway, hospital, and gas authorities that provide services paid for by users.

Differences of Chapter 9 Bankruptcy

The purpose of a municipal Chapter 9 bankruptcy is to provide the municipality protection from its creditors while it has a chance to develop a plan for dealing with its debts.  While similar to other forms of bankruptcy, Chapter 9 has some unique qualities.  First, since municipalities are entities of state governments the bankruptcy court’s power is limited by the 10th Amendment. Next, a big difference between a Chapter 9 and other bankruptcy chapters is that there is no provision for the municipality to liquidate its assets to distribute to creditors.   Another unique quality of a municipal bankruptcy is that the municipality may be a debtor in a Chapter 9 case only is it is specifically authorized to be a debtor under state law or by an officer or organization that has power under state law to authorize the municipality to be a debtor.  Twenty six states require municipalities to enact a specific statute in order for it to authorize the bankruptcy filing.

If you have questions about the different bankruptcy options available to you, please contact one of our offices to set up a consultation with an experienced attorney,