Bankruptcy Chapter 9

Bankruptcy Chapter 9 contains the provisions with regard to the reorganization of the finances of municipalities, which includes cities and towns, villages, counties, taxing districts, municipal utilities, and school districts. In the initial days when the municipalities were unable to meet the payment due to their creditors, they typically increased the tax rates, leaving a heavy burden on the citizens. But, this turned out to be ineffective during the Great Depression, leading to the origin of the Chapter 9.

Municipalities for bankruptcy under Chapter 9 have to voluntarily file a petition for the same to the bankruptcy court. To be eligible for Chapter 9, the municipality has to fall under certain criteria. Section 109(c) of the Bankruptcy Codes states that the State law or a governmental officer empowered by the State law has to authorize the municipality as a debtor, and it has to be insolvent under 11 U.S.C. § 101(32)(C). It is the municipality that has to express its desire to introduce a new financial plan to compensate the creditors that has to be approved by the majority of the creditors or negotiated in good faith.

When the Court approves the application for Chapter 9, it provides the municipality with the opportunity to make a comeback with minimal negative impact on the people. The debts are to be repaid according to the repayment scheme submitted by the authorities that has met with the approval of the Court. The debts can be reorganized by extending the duration of the loans, or with the creditors agreeing to pull down the principal or the interest. Sometimes the municipalities go for a financial reorganization through seeking a new loan to get over the situation. Through the financial reorganization the impact on the constituency is brought to the minimal level.

The most famous of the Chapter 9 petition was the one submitted by Orange County in the year 1994.