An individual can file for bankruptcy under different chapters depending on their eligibility. Some chapters, however, like Chapter 9 are reserved to a specific group of debtors like a municipality. Individuals who are curious about this type of bankruptcy should know the following details and see how this bankruptcy type won’t suit their financial problems.
Introduction to Chapter 9 Bankruptcy
Chapter 9 bankruptcy is the bankruptcy code meant for municipalities. Municipalities also need to undergo bankruptcy as well depending on their financial status and the amount of debt accumulated. They would need this bankruptcy code to help them reorganize their finances and deal with the debts.
A municipality includes all the villages, towns, and specific districts that have been a part of the area, making them important parts of obtaining municipal debts.
The cases where a municipality needs to file for such type of bankruptcy are rare, but it doesn’t mean this scenario doesn’t occur. A good example is the Orange County in California, which filed for municipal bankruptcy in 1994 after accumulating millions of debts.
Although the entity filing for Chapter 9 bankruptcy is called a municipality, it is still subjected to specific eligibility requirements. In fact, the definition can be very broad. A municipality is defined as a subdivision of a state or a public agency. Therefore, the term would mean it’s not only applicable for an actual municipality, but it can also extend to other state entities like school divisions, counties, towns and many more. It may even include entities that produce revenues paid by actual users rather than obtaining money from taxes.
Other eligibility requirements include getting state approval to be a debtor. Hence, a municipality will only be entitled to Chapter 9 bankruptcy if it’s an authorized debtor. Another eligibility requirement is the municipality should express is desire for debt adjustments. There are also several scenarios that make a municipality eligible of Chapter 9 like in cases when it can’t negotiate with creditors for impractical reasons.
People and Entities Involved in This Bankruptcy Type
There are several entities involved in dealing with Chapter 9 bankruptcy. Apart from the municipality, the creditors, bank court, and bankruptcy trustee or administrators take part in the filing process. Their power when it comes to Chapter 9 is limited as indicated by the court.
Creditors are granted much limited power in this chapter compared to other bankruptcy codes. They don’t attend first creditors’ meetings or set their own plans. Therefore, the advantage is considered to the favor of the debtor.
A trustee or the bankruptcy administrator may be appointed, but he also has limited roles. He doesn’t supervise the bankruptcy case or assess debtors in meetings.
Even the bankruptcy court has limited power being an entity that shouldn’t directly interfere with the debtors’ political freedom.
Despite their restrictions in Chapter 9 cases, all these entities still have their roles and should act accordingly.
Overall, a filing under Chapter 9 is not something available for everyone. However, it comes as a way to protect a municipality from gaining a huge problem because of their debts. Authorities handling this case would also need to ensure experts’ advise to see how the chapter will work for them.