Talk To An Attorney To Learn About Chapter 9
Chapter 9 bankruptcy offers multiple strategies to help municipalities that are struggling with excessive debts. But these bankruptcies may affect public employees and other stakeholders.
If you are affected by a bankruptcy proceeding or want to learn more about the Chapter 9 bankruptcy basics, speak to a bankruptcy lawyer near you.
What Is Chapter 9 Bankruptcy
Chapter 9 is specifically designed for municipalities, but it applies to more than just cities and towns. Counties, taxing districts such as hospital taxing authorities, municipal utilities, and school districts can employ Chapter 9 to reorganize debt.
The bankruptcy code defines a municipality as a “political subdivision or public agency or instrumentality of a State.” A municipality must meet four other requirements to file for chapter 9:
Chapter 9 can be utilized to extend the timeline for repayment, allow for the refinance of debt or for reduction of principal or interest on existing debts. Unlike what happens in a Chapter 7 straight bankruptcy case, the assets of a municipality cannot be liquidated under chapter 9.
- Alternate name: Municipal bankruptcy
C Plan Of Adjustment Requirements
i. Confirmation Requirements
A chapter 9 plan of adjustment is simply the document that provides for the treatment of the various classes of creditors claims against the municipal debtor. Similar to a chapter 11 debtor, a chapter 9 debtor submits a disclosure statement that describes the plan and related matters, and the disclosure statement is sent with a ballot to each impaired creditor with an opportunity to vote on the plan. Similar to a chapter 11 plan of reorganization, in order to be confirmed, the plan of adjustment must be accepted by a majority of creditors and two thirds in amount of claims within each class of claims that is impaired under the plan.
If a plan of adjustment is not approved, the bankruptcy court may dismiss the chapter 9 case, thereby stripping the municipality of the protections of the Bankruptcy Code. A bankruptcy court may also dismiss a chapter 9 case for a variety of other reasons, such as the failure of a debtor to prosecute the case, unreasonable delay, the non-acceptance of a plan by creditors or a material default or termination of a plan.
ii. Professional Fees )
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I Chapter 9 Case Issues
a. Eligibility Requirements )
Section 109 of the Bankruptcy Code sets forth the requirements to be eligible to file as a chapter 9 debtor. Specifically, a debtor must establish that it is a municipality, has specific authorization to file, is insolvent, wants to adjust its debts through a plan and meets one of four creditor-negotiation requirements.
i. Authorization to File )
Section 109 of the Bankruptcy Code provides that in order to be a chapter 9 debtor a municipality must be specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter.
The degree to which state laws permit chapter 9 filings varies from state to state. Twelve states specifically authorize chapter 9 filings, while 12 others permit bankruptcy filings given a further action to be taken by a state, official or other entity. In addition, three other states authorize a limited subset of municipalities to file for bankruptcy. The remaining 23 states do not authorize municipal bankruptcy filings.
ii. Negotiation with Creditors -)
b. Chapter 9 Case Administration
i. Automatic Stay of Enforcement of Claims Against the Debtor
ii. Avoidance Powers
iii. Bankruptcy Judge )
iv. Collective Bargaining Agreements
v. Official Committees )
Types Of Bankruptcy Under The Us Bankruptcy Code
When a debtor faces serious debt problems, one option is to file bankruptcy. When filed, bankruptcy can stop some creditors from seeking damages against the debtor in court, discharge some debts and allow debtors to get a fresh start, free from the burden of debt they cant pay back.
Bankruptcy law also places restrictions on how often debtors can file. This is necessary to keep debtors, or people that owe money, from taking advantage of the system. Other restrictions include meeting certain income-level requirements and proving in a court of law that the debt accrued cant be paid.
Depending on whether the debtor is an individual, business or municipality, different chapters of the bankruptcy code apply to the debtor.
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A Primer On Municipal Bankruptcy
Published in Pratt’s Journal of Bankruptcy Law .
The current economic stress caused by the COVID-19 pandemic is likely to continue for the foreseeable future. The loss of revenue and income by companies and individuals has already severely reduced tax revenue for state and local governments while at the same time many of these same governmental entities are expending vast sums fighting the pandemic. These increased expenditures are not likely to be offset by tax revenue. Quite the opposite appears true increased costs with decreasing revenue will lead to large budget deficits. Absent aid from the Federal Government, states will be left with limited resources to assist municipalities facing budgetary shortfalls.
If a municipality is not able to file for Chapter 9, an out of court restructuring may have to be pursued, such as a refinancing or extension of debt obligations, tender offers or exchanges or other negotiated resolutions. In certain states, financial boards or administrators may be appointed to oversee the finances of the municipality. States have a complex tangle of laws and regulations relating to municipalities and must be thoroughly reviewed when considering the possible outcomes of a municipal distress situation.
Below are frequently asked questions about municipal Chapter 9 bankruptcies.
What is Chapter 9 of the Bankruptcy Code?
What is considered a municipality for the Bankruptcy Code?
Can a municipality be put into Chapter 9 involuntarily?
Inclusion Of States In Chapter 9
Neither Chapter 9 nor any other part of U.S. bankruptcy law allows a state to file for bankruptcy, although states have defaulted on their obligations. The last U.S. state default took place in 1933, when Arkansas defaulted on its bonds.
Certain politicians and scholars have argued that the law should be amended to allow states to file for bankruptcy. Proponents say that an orderly bankruptcy is a better solution than the two alternatives: defaults, which are violations of debt obligations outside of the bankruptcy process), and bailouts by the federal government. Opponents, including representatives of the National Governors Association, say that amending the law to allow states to seek bankruptcy protection could create doubts in the municipal bond market.
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Chapter 9 Title 11 United States Code
Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assisting them in the restructuring of their debt. On July 18, 2013, Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 bankruptcy protection. Jefferson County, Alabama, in 2011, and Orange County, California, in 1994, are also notable examples. The term ‘municipality’ denotes “a political subdivision or public agency or instrumentality of a State,” but does not include a state itself. States are therefore unable to file for bankruptcy, even though they have defaulted in their obligations.
The Different Chapters Of Bankruptcy Explained
Most people in the United States are familiar with the term bankruptcy.
Bankruptcy, handled in the federal courts, can help a person get rid of any debt they have or make a plan to repay it.
However, can you tell the differences between each of the different chapters of bankruptcy? There are six chapters of bankruptcy in the United States, Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15, with Chapter 7 and Chapter 13 bankruptcy being the most common forms filed.
Below is an overview of the details of each of the different chapters of bankruptcy.
Chapter 7 bankruptcy, sometimes referred to as liquidation bankruptcy, is the most common type of bankruptcy in the U.S., and the most basic form of bankruptcy. Chapter 7 provides liquidation of an individuals property and then distributes it to creditors. Individuals are allowed to keep exempt property.
The courts may provide businesses that file chapter 7 with a trustee that operates the business for a period of time. In general, the trustee will take charge of asset liquidations and proceeds.
Chapter 9 bankruptcy is a bankruptcy for municipalities cities, towns, counties and school districts, for example. Municipalities that file chapter 9 earn protection from creditors while they develop a plan for adjusting their debts. In 2013, the city of Detroit filed chapter 9, becoming the biggest city in the history of the U.S. to file for bankruptcy.
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Iii Monoline Municipal Bond Insurers
In 2007, there were six AAA monolines that insured municipal bond debt. These companies, however, experienced various degrees of financial distress as a result of their structured finance obligations. Below is a brief summary of the current financial status of each company.
a. Ambac Assurance Corporation
As of November 2007, Ambac had $556 billion of insured obligations outstanding. In 2008, Ambacs financial condition began to be adversely affected by the effects of problems arising from mortgage lending practices in the United States because Ambac underwrote direct financial guaranties of RMBS obligations and CDS on collateralized debt obligations backed primarily by RMBS. On March 24, 2010, at the request of the Wisconsin Office of the Commissioner of Insurance, Ambac formed a segregated account, which is a separate insurer from Ambac, and filed a petition for rehabilitation that limited the rehabilitation to only the segregated account, while leaving most policies in the general account with Ambac. Ambacs municipal bond obligations remained in the general account and, therefore, were not affected by the rehabilitation proceeding.
b. CIFG Guaranty
c. Financial Guaranty Insurance Company
d. Assured Guaranty Corp.
e. MBIA Insurance Corporation
f. Syncora Guarantee Inc. )
Federal Tax Refunds During Bankruptcy
You can receive tax refunds while in bankruptcy. However, refunds may be subject to delay or used to pay down your tax debts. If you believe your refund has been delayed or offset you can check on its status by going to Wheres My Refund tool or by contacting the IRS Centralized Insolvency Operations Unit at 1-800-973-0424. The unit is available Monday through Friday from 7:00 a.m. to 10:00 p.m. eastern time.
Discharge: If you successfully complete your bankruptcy plan you will receive a discharge of debt. A discharge releases you from personal liability for certain dischargeable debts. Some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on the unique facts and circumstances of each case. Consult your bankruptcy attorney to determine which tax debts may be discharged.
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Terms Of Eligibility For Chapter 9 Bankruptcy
Chapter 9 applies only to a political subdivision or public agency or instrumentality of a state. Generally, that includes cities and towns, counties, taxing districts, revenue-producing bodies such as highway authorities, municipal utilities and school districts. It does not apply to state governments.
To file for Chapter 9 protection, a municipality must:
- Be authorized to file for Chapter 9 under state law.
- Be insolvent, which means that the municipality has not or cannot pay its debts.
- Be willing to devise a plan to restructure its debts.
- Make a good-faith attempt to negotiate a settlement with its creditors.
Assignment Of Case To A Bankruptcy Judge
One significant difference between chapter 9 cases and cases filed under other chapters is that the clerk of court does not automatically assign the case to a particular judge. “The chief judge of the court of appeals for the circuit embracing the district in which the case is commenced the bankruptcy judge to conduct the case.” 11 U.S.C. § 921. This provision was designed to remove politics from the issue of which judge will preside over the chapter 9 case of a major municipality and to ensure that a municipal case will be handled by a judge who has the time and capability of doing so.
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Types Of Municipal Debt
Once it passes the eligibility gauntlet, the municipality must then turn its attention to its exit strategy. The most common forms of debt in a municipal bankruptcy are, naturally, bond debt and public employee obligations. Municipalities will, of course, also have ordinary trade and vendor liabilities but these are generally limited in amount. Unlike long-term bond debt, other municipal liabilities are often subject to state debt limitation provisions. Generally speaking, these provisions restrict the ability of municipal entities to incur, without a popular vote, indebtedness that exceeds anticipated fiscal year revenues, or a percentage thereof, or to satisfy, without a popular vote, indebtedness incurred in one fiscal year from the revenues of a future fiscal year. The provisions operate as a form of balanced-budget, “pay-as-you-go” rule for municipalities, generally requiring that each fiscal year’s obligations be paid out of the income and revenue attributable to that year. In some jurisdictions debts incurred in excess of the borrowing limitations may be unenforceable. In many cases, therefore, outstanding trade obligations are not a significant portion of a municipality’s total pre-petition claims pool.
Purpose Of Municipal Bankruptcy
The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs. Indeed, due to the severe limitations placed upon the power of the bankruptcy court in chapter 9 cases , the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under chapter 11. The functions of the bankruptcy court in chapter 9 cases are generally limited to approving the petition , confirming a plan of debt adjustment, and ensuring implementation of the plan. As a practical matter, however, the municipality may consent to have the court exercise jurisdiction in many of the traditional areas of court oversight in bankruptcy, in order to obtain the protection of court orders and eliminate the need for multiple forums to decide issues.
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Cities School Districts And Other Municipalities File Chapter 9 Bankruptcy
Cities and school districts don’t use Chapter 7 or Chapter 13 the way an individual would, or even Chapter 11the bankruptcy type most often used by businesses. Instead, municipalities seek relief under Chapter 9a rarely used chapter with less than 700 case filings since 1937. However, that could soon change.
Recent events like the 2008 financial crisis and the COVID-19 pandemic have raised new legal concerns, with some speculating that Chapter 9 might be used by municipalities more frequently. Defined as a “political subdivision or public agency or instrumentality of a State,” a municipality includes:
- highway, bridge, and gas authorities.
Chapter 1: Business Reorganization
For a business, bankruptcy does not necessarily mean ruin. If it did, there would be three fewer major air carriers , two fewer car manufacturers , and no Marvel Universe.
Chapter 11 filings which surged during the coronavirus shutdown in 2020 allow troubled businesses to protect themselves from creditors while they reorganize their business operations, debts, and assets.
If all goes well, the business re-emerges a few years later oftentimes smaller, sleeker, more efficient, profitable and creditors have enjoyed a more satisfactory return than they would have if the business ended operations and was liquidated.
Sometimes, however, Chapter 11 buys only time. The reorganization plan fails, and liquidation results. The 2011 demise of Borders Books, once the nations No. 2 bookseller, is a prominent example.
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Which American Municipalities Have Filed For Bankruptcy
Across the country, from Vallejo, Calif. to Detroit, Mich., some cities that cannot repay their debts have taken the extreme step of declaring municipal bankruptcy.
Cities file for bankruptcy under Chapter 9 of the Bankruptcy Code. Yet before a city can declare Chapter 9 bankruptcy, the city must establish it is eligible to do so according to state law.
Chapter 9 bankruptcy is relatively rare. Weve listed the cities and towns that have filed for Chapter 9 bankruptcy since 2008 on the map below.
According to bankruptcy attorney Karol Denniston, when a city owes money to its employees, pensioners, and creditors, these debts constitute a contract similar to a business taking out a loan. If the debts cannot be repaid, a municipality may consider bankruptcy as a last resort to negotiate reduced financial liabilities.
But unlike individuals and corporations, cities are not always allowed to declare bankruptcy.
Bankruptcy is a federal process. In turn, a state must give its cities, towns, counties, and other municipalities governmental administrative districts like irrigation authorities or hospital districts the right to petition the federal government to restructure their debts.
Without permission from the state, the federal government granting a bankruptcy petition for a municipality would violate a states authority and therefore, the 10th amendment.
Some states, like Arizona and Washington, expressly grant municipalities the right to file for bankruptcy.