If you are a consumer debtor who is interested in filing bankruptcy, you will most likely file a Chapter 7 or Chapter 13 bankruptcy depending upon your income and the types of debts that you have.
You would not consider a Chapter 9 bankruptcy because it allows for the debt reorganization of cities, towns, villages, school districts and municipal utilities – it's known as the "municipal bankruptcy," and was first enacted in 1934 during the Great Depression.
Though Chapter 9 filings are rare, there have been two highly publicized cases since the 1990s beginning with the 1994 Chapter 9 filing by Orange County, California, and the July 18, 2013 filing by the City of Detroit, Michigan, the largest Chapter 9 filing in U.S. history, which removed around $7.4 billion in debt from Detroit's books.
Why Chapter 9 Bankruptcy Was Created
Municipalities, like individuals and businesses, can become financially-distressed, thus, Chapter 9 bankruptcy was established to protect municipalities from creditors as they develop plans to repay their debts. The reorganization of a municipality's debts is accomplished by:
- Extending debt maturities
- Reducing principal
- Reducing interest
- Obtaining a new loan
- Refinancing debt
While Chapter 9 has similarities with other chapters in many respects, Chapter 9 does not provide for the liquidation of a municipality's assets so they can be distributed to creditors. In contrast to a Chapter 11, corporate reorganization bankruptcy, the function of the bankruptcy court in a Chapter 9 is more limited.
The bankruptcy court's duties in a Chapter 9 involve approving the bankruptcy petition, confirming the municipality's plan for a debt adjustment, and ensuring that the plan is duly implanted.
Only "municipalities" can file under a Chapter 9 per 11 U.S.C. § 101(40). Municipalities include cities, counties, school districts, townships, and public improvement districts, but they can also include bridge, gas and highway authorities.
For more information about the various chapters of bankruptcy, contact a bankruptcy attorney in our directory.