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A Quick Look into Chapter 9 Bankruptcy

A Quick Look into Chapter 9 Bankruptcy

As the name implies, an entity must be a municipality for it to qualify for Chapter 9 bankruptcy. What exactly constitutes a "municipality," though? A "municipality" as defined by the U.S. Code is a "political subdivision or public agency or instrumentality of a State."

 

Common types of municipalities include cities, towns and villages. Aside from this basic eligibility requirement, bankruptcy court has more specific conditions for relief under municipality reorganization. To apply for Chapter 9 bankruptcy, a municipality must be acknowledged by state law to be a debtor and insolvent, must devise a plan to adjust its debts, and must make an attempt to negotiate with creditors and gain their assent to the plan outlined by city/town officials.

         

Filings under Chapter 9 are much less frequent than those of Chapter 7 bankruptcy. This comparison in itself, though, does little to indicate just how rare petitions for Chapter 9 bankruptcy might be. In terms of absolute numbers, applications for municipality reorganization are quite few indeed. Since this concept was made legal more than half a century ago, less than 500 claims have been made under Chapter 9. 

         

What is particularly notable about Chapter 9 bankruptcy is that the role of bankruptcy courts is much diminished in these proceedings. For one, the mechanisms by which a court is assigned are notably different. 

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