Monday, June 6, 2011

What is Chapter 9 Bankruptcy?

Chapter 9 is the municipal bankruptcy.  The term "municipality" is defined in the Bankruptcy Code as a "political subdivision or public agency or instrumentality of a State." See 11 U.S.C. § 101(40). This definition is broad enough to allow municipal bankruptcy filings by cities, counties, school districts, townships, public improvement districts and the like. It can also included organizations that provide services which are paid for by users rather than by general taxes.  These include bridge authorities, highway authorities, and gas authorities.

Chapter 9 bankruptcy filings are rare.  The most recent notable chapter 9 filing was by Orange County, California in 1994.  Although chapter 9 is similar to other chapters in many ways, in one notable way it is quite different. There is no provision in chapter 9 for the liquidation of the assets of a municipality and distribution of the proceeds to creditors. Like the other bankruptcies, the goal is to resolve outstanding debt issues.

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