Could Chapter 9 Bankruptcy Happen in My Town?

Wed, Nov 28, 2012


Yes, it could. However, it is not very common.

Chapter 9 bankruptcy is the bankruptcy of a municipality. The website defines a municipality as: cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.” Further, “it also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities.” states Only about 20 percent, or 43, of the Chapter 9 cases filed in the U.S. since 1981 were by towns, cities or counties. Of those, California, Alabama and Texas led the way.”

This type of bankruptcy has its roots in the Great Depression. That tumultuous time was hard on many cities and towns. Thus, laws similar to today’s Chapter 9 bankruptcy laws were enacted in an effort to limit damage to a town during this devastating event.

Not all municipalities are eligible for Chapter 9 bankruptcy, though. The bankruptcy code sets forth various rules, including that the municipality must be willing to “effect a plan to adjust its debt.” Further information about the requirements to be a debtor under Chapter 9 bankruptcy and the history of Chapter 9 bankruptcy is found on the website.

Chapter 9 bankruptcy allows a municipality to reorganize its debt through a plan it files with the court. The court cannot order liquidation of assets, so it usually just acts as the instigator and overseer of the reorganization of debt. This reorganization of debt might include reduction of debt, better interest rates, longer time to pay it off, etc. Law limits the court’s interference in a Chapter 9 bankruptcy case. The creditors also have a more limited role. The creditors can be part of a creditor’s committee, however. (SmithLaw wrote a post about these a while back. It is found here on our blog.)

Some recent Chapter 9 bankruptcy situations include:

San Bernardino, California (they cite numerous issues that contributed to a $46 million budget shortfall–according to

Stockton, California (would of had a $26 million deficit for the coming fiscal year if they didn’t file-according to Reuters)

Jefferson County, Alabama ( cites the sewer system as the major problem)

Attorney Christopher D. Smith with SmithLaw in Sarasota, Florida found that Florida has also had Chapter 9 bankruptcies, the most recent being in 1995. It was filed by the Lake Apopka Natural Gas District according to the Financial News and Daily Record. The Orlando Sentinel states that it was apparently the victim of a growing gas glut in Florida.”

While Chapter 9 bankruptcy is a real concern, it does not cause the same consequences as a personal bankruptcy does. There is more legislation in place to keep the town going and allow it to get back on its feet without giving up as much. It is a cry for help that allows the town to get back on track.

Image: Some rights reserved by joe.lipson



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