Chapter 9 is a bankruptcy proceeding that provides financially distressed municipalities with protection from creditors by creating a plan between the municipality and its creditors to resolve the. But it is a bit broader than just cities and towns. Counties, taxing districts like hospital taxing authorities, municipal utilities, and school districts can employ Chapter 9 to reorganize debt. 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 . Amendments. —Pub. L. –8, title II, § (b)(2), Apr. 20, , Stat. 49, added item —Pub. L. –, title III, § (a)(2), Oct. 22, , Stat. , substituted “against estate” for “by trustee or officer” in item and added items and —Pub. L. 95–, title III, § (b)(2), (d)(3), (e)(3), (f)(3), Nov. 6, , 92 Stat.
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Therefore, the federal courts cannot force a municipality to liquidate. In effect, the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under Chapter The role of bankruptcy court in Chapter 9 proceedings are limited and focused on approving a plan of debt reduction and overseeing the execution of the plan. Only municipalities may file for Chapter 9 bankruptcy.
Four other eligibility requirements for Chapter 9 as set forth in Section c of the Bankruptcy Codes are:. Before a municipality can file for Chapter 9, it must have made an effort to negotiate with its creditors. The intent of Chapter 9 is to negotiate a repayment plan between the municipality and creditors, which can include reducing the principal or interest rate on outstanding debt, extending the term and timeline of the loan repayments, and refinancing the debt by obtaining a new loan.
The whole process can last from a few months to a few years, depending on the complexity of the case and the amount of debt. As with Chapter 7 and Chapter 13 , the filing of a Chapter 9 reorganization triggers an automatic stay , which stops all collection actions against the municipal debtor. Under certain circumstances, the stay also protects officials of the municipality. In , Detroit became the largest city in U. Debt Management. Corporate Finance. Your Money.
Personal Finance. Your Practice. Popular Courses. Part Of. Bankruptcy Basics. Types of Bankruptcy. Personal Bankruptcy. Corporate Bankruptcy. Bankruptcy: Your Legal Rights. Normally a bankruptcy court has broad power over a Chapter 11 corporate debtor that wishes to reorganize. However, the bankruptcy code imposes limits on that power in connection with Chapter 9 cases because municipalities are unique entities with constitutional protection.
Generally, the law states that the court cannot interfere with the governmental powers of the debtor or its revenue or property. Also, the court cannot convert the case to another chapter or appoint a trustee in a chapter 9 case. Similar to a Chapter 11 case, a Chapter 9 debtor must file a plan. The plan sets forth how the municipality is going to reorganize its debts within the limits of bankruptcy. Similar to Chapter 11, the plan must be confirmed by the bankruptcy court.
A municipality receives a bankruptcy discharge at a point after the plan is confirmed and the debtor deposits any required funds or property with the court-appointed disbursing agent. Usually, there are fewer than 10 Chapter 9 cases each year. United States Courts. MuniNet Guide. Bankruptcy Types. By Full Bio. David is a full-time attorney experienced in basic bankruptcy concepts as well as advanced issues such as secured transactions, liens, and lawsuits in bankruptcy court.
Read The Balance's editorial policies. It must be specifically authorized to file for Chapter 9 under state law. It must be insolvent. It must have a desire to adjust its debts. It must obtain the agreement of the majority of certain types of creditors or at least evidence that an attempt to negotiate was made or that it would be impractical to obtain an agreement. Alternate name : Municipal bankruptcy. Some recent cases include:.
Key Takeaways A chapter 9 bankruptcy allows a municipal government entity to reorganize its debts and seek protection from creditors. The ability of courts and creditors to interfere in municipal affairs under chapter 9 is limited due to constitutional restrictions.