Chapter 9 Bankruptcy -
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Chapter 9 and Municipality
Chapter 9 is an adjustment of debts of a municipality. The term "municipality" is defined in Bankruptcy Code Section 101(40) as "a political subdivision or public agency or instrumentality of a state". This includes cities, towns, counties, school districts, public improvement districts and other such entities.
The purpose of Chapter 9 is to provide an insolvent municipality with the protection of the federal bankruptcy court's automatic stay, protecting it against creditor action, while it formulates a debt adjustment plan. This plan can have any number of features, including: rejecting or restructuring burdensome public employee union collective bargaining agreements; reducing principal and/or interest on debts; extending the maturity dates of obligations; selling certain assets to raise money for debt payment; and borrowing money to refinance the existing debt at a better rate. Chapter 9 is voluntary only, and creditors cannot force a municipality into bankruptcy court.
Municipal bankruptcies have not been very common. In fact, there have only been about 500 such cases, averaging about 8 or 9 per year, across the entire country. There have been some high-profile cases. California's Orange County filed Chapter 9 in 1994, due primarily to heavy losses it incurred in risky securities investments. San Jose Unified School District filed Chapter 9 back in the early 1980's, due to a variety of factors, including unwieldy union contracts. The City of Vallejo, California, filed Chapter 9, due primarily to the enormous cost of public employee union salaries and pension obligations.
A Chapter 9 debtor needs to be a "municipality", and must satisfy the following 4 additional requirements set forth in Bankruptcy Code Section 109 ( c):
municipality must either:
The municipality must either:
Chapter 9 May Become More Popular
The filing rate of Chapter 9 cases may explode, however,
due to the pervasive economic decline confronting the country. Many
municipalities are almost hopelessly insolvent, due to declining property
tax and other revenues, coupled with ever-increasing burdens of runaway
public employee union salary and pension plans obligations. Many cities
are finally taking steps to reduce these obligations through renegotiated
contracts, furloughs, and other cuts. However, where compromise cannot
be achieved, and the parties remain intractable in their positions,
Chapter 9 may become the solution. It may be the only way that fiscal
sanity and financial responsibility can be restored.
Written by Henry Rendler
Written by Henry Rendler
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