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Chapter 9

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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.

Deeper Definition

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.

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