Unlike the other chapters which are applicable for individuals and organizations, Chapter 9 Bankruptcy is specially developed for municipalities, therefore the cases under this chapter are quite rare in US. This means that towns, cities, villages, counties and even districts (taxing and school ones) can receive the special terms of repaying debts from the bankruptcy court.
The Chapter 9 Bankruptcy definition says that municipalities, in case they find themselves overwhelmed by unbearable debts, can file for bankruptcy in order to change the terms of paying the debts. This chapter does not give the full discharge and no property or assets selling occur. Instead, the Trustee, who is appointed by the court to supervise the debt’s reorganization process, manages all activities according to the court order.
The first and the main requirement the municipality should match in order to file for Chapter 9 is insolvency. Insolvent municipality should prove the bankruptcy court it has put all possible efforts into negotiations with the creditors. If negotiations failed or municipality provides the court with the proofs of impossibility to make negotiations, the bankruptcy process could be started.
So, what is Chapter 9 Bankruptcy and what is was developed for?
- The purpose of Chapter 9 Bankruptcy is to give municipalities an opportunity to adjust their debts in order to let them keep operating and providing services. By filing for this chapter, financially troubled municipalities receive instant protection from the creditors and collective activities which worsen the situation.
- According to the Bankruptcy Codes, only insolvent municipalities can qualify Chapter 9 and receive the debt’s relief from the bankruptcy court. Insolvency much match the definition of 11 U.S.C. § 101(32)(C) of the Bankruptcy Codes.
- Municipality or the bankruptcy lawyer who act on behalf of the municipality should obtain an approval of the majority of its creditors regarding the bankruptcy petition. The debtor should then file a list of its creditors. No creditor’s preferences (in payments) are allowed.
- Filing a debt’s adjustment plan. The plan should be filed with the petition and must contain the detailed description of debt’s modifications and adjustments (after the negotiations with the creditors).
What is really good about this chapter – the bankruptcy court does not restrict municipalities (the debtors) from taking any necessary reasonable actions in order to operate in alignment with the Plan.
It’s important to note that court, within 180 days after an order, may cancel the confirmation of the bankruptcy plan. This may happen if the municipality is noticed in violating the court’s order (after the special hearing regarding the fraud).