An Introduction to Chapter 9 Bankruptcy

Normally, any individual is considering filing bankruptcy for themselves will have to file either Chapter 13 or Chapter 7 bankruptcy. Businesses generally file either Chapter 11 or Chapter 7 bankruptcies. There are, however, a few other key types of bankruptcy which exist. Chapter 9 is one such option, and it is specifically tailored to help municipalities that could benefit from filing bankruptcy.

Chapter 9 cases are rare, but they can be extremely complicated and deal with millions of dollars in debt. Perhaps the most well-known modern Chapter 9  bankruptcy filing is the City of Detroit, Michigan. It filed for bankruptcy in 2013. It is the largest city in history to file for bankruptcy, and its debts amounted to roughly $18.5 billion.

Definition of a Municipality

A municipality is more than just a city or town. It also includes counties, sanitation districts, school districts, and even some hospitals. Not all states permit governments to file for bankruptcy. Michigan, however, does permit Chapter 9 filings.

The bankruptcy code has a broad definition of a municipality, but the requirements to be a debtor under Chapter 9 are somewhat constrained. Generally, a municipality under bankruptcy law is a “political subdivision or public agency or instrumentality of a State.” To enter bankruptcy, the municipality must meet four requirements:

  1. Specifically authorized by state law to become a debtor
  2. Actually insolvent (as defined by bankruptcy law)
  3. Desire to create a plan to adjust its debts
  4. Negotiate with creditors to create a workable repayment plan

The fourth requirement is tricky because not all creditors will be willing to be subjected to a bankruptcy plan. However, there are certain methods to get around creditors that do not agree to a plan, and an experienced bankruptcy attorney can help with those potential difficulties.

Filing a Plan and Judge Assignment

Municipality bankruptcies are similar to other bankruptcies in that the municipality must still file a bankruptcy petition and listing of creditors. Chapter 9 bankruptcies are always voluntary. Liquidation (as in a Chapter 7 bankruptcy filing) is not an option for municipalities. Instead, they must create a repayment plan.

Unlike other types of bankruptcy, a judge is assigned to a Chapter 9 bankruptcy by the court of appeals for the circuit that includes the district where the municipality has filed. This arrangement is a protection for the municipality to help avoid political conflict. It also permits the circuit to assign this potentially large and complicated case to a judge that has the time and resources to devote to it.

Chapter 9 bankruptcy filings vary significantly in other ways compared to bankruptcy filings under other Chapters. This is, in part, because of the concern that the federal government is infringing on a state’s rights in these proceedings.

Call Maxwell Dunn PLC if your municipality is facing a financial challenge.  We can help you fully understand its options and best potential courses of action.