What Is Chapter 9?
Chapter 9 is a bankruptcy category in the United States that grants financially distressed municipalities protection from their creditors. This is done by developing or negotiating a plan to pay their debts.
The Chapter 9 bankruptcy category deals with municipalities that are overwhelmed by their debts. The law defines “municipality” as any “political subdivision or public agency or instrumentality of a State”. The definition broadly includes government entities such as cities, counties, townships, school districts, and taxing districts.
The Chapter 9 bankruptcy code is similar to the Chapter 11 bankruptcy code in certain aspects. For instance, the Acts allow debtors to reorganize their operations and propose a repayment plan in both cases. However, Chapter 9 significantly differs from other sections of the bankruptcy code (including Chapter 11) because there is no provision in Chapter 9 for liquidating the municipality assets. This is unlike other regulations where the court may sell a debtor’s assets to pay some or all their debts.
Municipalities are entities of State governments, and each state has sovereignty. As a result, there are limits to the powers of a bankruptcy court in a Chapter 9 bankruptcy case due to the Tenth Amendment to the United States Constitution. The bankruptcy court in chapter 9 cases can approve the bankruptcy petition. This is if the municipality is eligible, confirm their proposed debt adjustment plan, and ensures proper implementation of the adjustment plan.
In essence, a Chapter 9 bankruptcy goal is to negotiate a repayment plan between a municipality and its creditors. Usually, the proposed repayment plan may include the following:
- Reducing the interest rate on outstanding debt
- An extension of the loan repayment term
- Obtaining a new loan to finance the existing debts
Chapter 9 Example
Since the establishment of the law in 1937, less than 500 municipal in the United States have filed a Chapter 9 bankruptcy petition.
In 1994, Orange County in California filed a Chapter 9 bankruptcy petition seeking assistance from the court to restructure a $1.7 billion debt.
In 2011, Jefferson County in Alabama filed a Chapter 9 bankruptcy petition seeking assistance from the court to restructure a $4.2 billion debt.« Back to Glossary Index