When people think of bankruptcy they likely think of someone struggling with personal finances. Did you know that it is possible for an entire city to go bankrupt? Municipality Bankruptcy, also called Chapter 9, was set up in the Great Depression in order to cope with the crashing economy. A municipality includes cities, towns, villages, counties, taxing and even school districts. Since the bill was enacted, the United States has seen at least 500 of these cases filed. One of the most significant examples of a bankrupt city is in the 1994 filing by Orange County, California which involved millions of dollars.
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Like an individual person who is struggling with their finances, Chapter 9 can be a solution for municipalities to stave off creditors and reorganize their debts to a more manageable level. Unlike Chapter 7 though, this version does not involve any type of asset liquidation. This is because asset liquidation would violate the Tenth Amendment to the U.S. Constitution which states that each state is sovereign over their own affairs. Like any individual case of going bankrupt, the municipality must meet certain standards in order to qualify.
According to Section 109 of the code, they must be authorized to be a debtor by some state law or government power. They must be considered "insolvent" which means that they are unable by any means to pay debts. The municipality must also be willing to initiate a payment plan in order to adjust any and all debt that they have incurred as well as negotiate with creditors. A city that chooses to file for Chapter 9 may actually improve the financial situation of those who live there. A city is indicative of the residents, so it would be in the best interest of citizens in many cases for their city to file Chapter 9, although this is pretty rare.
The entire U.S. economy is currently facing rising financial problems. The current national debt is around $15 trillion dollars. Many municipalities are wondering how they are supposed to cope with the economic downturn without digging their heels in too deep. Thankfully, this type of bankruptcy does not directly affect your individual finances, but they may give an indication of them. A city is made up of its people, so if you are struggling to keep up with your payments then you may need to consider the possibility of obtaining legal help.
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