What Will Happen If a City Goes Bankrupt?

Over the last few weeks, municipalities have declared bankruptcy. Chapter 9 of the Bankruptcy Code provides for reorganization of municipalities, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.

Chapter 9 filings are not common. From 1986-2011 there were 263 Chapter 9 bankruptcies filed nationwide, with 13 filed in FY 2011. The majority of the cases in the last 40 years have been for utility districts and not sovereign government entities.

This map shows total Chapter 9 bankruptcies by district from 1991 to 2011.

USA BankruptcyThe 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.

Learn more about Chapter 9 and Bankruptcy Basics here.

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