An Introduction to Chapter 9 Bankruptcy

Chapter 9 is a form of bankruptcy that protects insolvent municipalities from creditor actions by allowing them to reorganize their debts, extend the repayment timeline, reduce principal or interest on existing debts, or refinance. The Bankruptcy Code defines ‘municipalities’ as government entities such as:

  • Cities
  • Townships
  • Counties
  • Municipal utilities
  • School districts
  • Taxing districts

Of all the bankruptcy types, Chapter 9 is the most uncommon. Between 1937 and 2013, only 650 cases have been filed, or an average of less than 10 per year. When it filed for Chapter 9 in 2013, Detroit became the biggest city in U.S. history to do so. It also carried the largest municipal debt ever at an estimated $18.5 billion.

Conditions for Filing

Any municipality that intends to file for Chapter 9 bankruptcy must meet four requirements:

  • It must be authorized under state law to file for Chapter 9. For example, Georgia does not allow municipalities to seek bankruptcy protection under any circumstances while Montana permits all municipalities except counties to file for Chapter 9. In Oklahoma, any municipality may file.
  • It must be insolvent, meaning that the total of its debts exceeds the combined value of its assets.
  • It must want to adjust its debts.
  • The majority of certain types of creditors must agree to the filing or, at the very least, the municipality must be able to demonstrate that a good-faith attempt was made to negotiate or that such a negotiation would be impractical.

Some states require municipalities to try negotiating with creditors first. In some cases, a court may decide to disallow a filing if it finds that other debt solution options are available or a creditor argues that the municipality did not follow state procedures.

The Chapter 9 Process

Like a Chapter 11 case, municipalities filing for Chapter 9 must present a plan that establishes how it will reorganize its debts. Once it is confirmed by the bankruptcy court, an automatic stay goes into effect, protecting the municipality (and in some cases, its officers or officials) from creditor actions.

Chapter 9 cases are complex and may even have a political element, so the chief judge of the Court of Appeals for the bankruptcy court location will appoint the judge to handle the case. Although bankruptcy courts typically have broad power over corporate debtors, municipalities are unique: the judge cannot interfere with the debtor’s property, revenue, or governmental powers.

Other differences between Chapter 9 and other bankruptcy chapters include:

  • There are also no trustees in a Chapter 9 case.
  • Creditors cannot usually get their money by compelling the liquidation of a municipality’s assets

After the plan is confirmed and the municipality deposits the agreed-on amount of money or assets with the court, it receives a bankruptcy discharge.

Contact an Oklahoma Chapter 9 Attorney

Chapter 9 bankruptcies are rare, but enough cases have been filed to suggest that municipalities may need debt relief like individual and corporate debtors. If you have questions about filing for Chapter 9 in Oklahoma, contact the Law Offices of B. David Sisson. Attorney Sisson will explain the rules that apply in your case and help you comply with all state and federal requirements so that your municipality can regain solvency.

B David Sisson

5/5.0

Peer Rating

Independently conducted by Martindale