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Most forms of bankruptcy deal either with a consumer (as with Chapter 7 or Chapter 13 bankruptcy) or with a business (like Chapter 11 or Chapter 15 bankruptcy); however, there is one type of bankruptcy that provides federal relief for municipal debts: Chapter 9.
Although Chapter 9 deals with municipalities, the process is essentially the same as that for individuals or corporations. If the Bankruptcy Court grants a municipality's Chapter 9 petition, the municipality can then negotiate a payment plan to pay back the debts owed to its creditors and other lenders. The negotiations can include structuring a repayment plan, lowering the amount owed, lowering the interest rate on the loans, refinancing, or extending the loan's terms.
As mentioned, Chapter 9, which is named after Chapter 9, Title 11 (as well as Chapter 9, Title 18) of the United States Code, is a form of bankruptcy that does not apply to an individual or a company. It is strictly for municipalities, which can be anything from a city, town, school district, county, or even a state (depending on some U.S. state codes). A municipality is generally held to mean many forms of governmental and administrative units, which also include cities.
Unfortunately, there have been a few examples of a city or a county filing for protection under Chapter 9 bankruptcy. The most recent example is the city of Detroit, Michigan, which filed on July 18, 2013. Currently, Detroit is the largest city in United States history to have filed for Chapter 9. Prior to Detroit's bankruptcy, Jefferson County in Alabama, Stockton, California, and Orange County in California were three of the more famous instances (Jefferson County filing in 2011, Stockton in 2012, and Orange County in 1994).
The city of Detroit's Chapter 9 bankruptcy filing is currently the largest in terms of debt, with an estimated debt between 15 to 20 billion dollars. In comparison, Jefferson County's bankruptcy filing in 2011 totaled $4 billion. Orange County was, at the time of its filing in 1994, the largest with a loss of $1.7 billion. It took Orange County, California, two years to come out of Chapter 9 bankruptcy proceedings. While Stockton, California's debts seem smaller (approximately $700 million), the effects of the bankruptcy meant additional financial hardships. The bankruptcy led to a 0.75-cent sales tax increase and Stockton negotiated an agreement with city employees regarding their pensions.
In addition to uniquely offering federal protection from creditors to municipalities, Chapter 9 bankruptcy also places limits on the bankruptcy court with constitutional protections. Since municipalities are cities, towns, villages, counties, and are considered as parts of state governments, they also have some protections under the Tenth Amendment to the U.S. Constitution.
While they are highly publicized, Chapter 9 bankruptcy cases are thankfully rare. The first municipal bankruptcy legislation was enacted during the Great Depression; in the 60 years since, less than 500 municipalities have filed for bankruptcy.
If you would like to learn more about the different forms of bankruptcy, you can read more about
- Chapter 7 (which means liquidation of your assets);
- Chapter 11 (the most common business bankruptcy);
- Chapter 13 (where your finances are reorganized); or
- Chapter 15 (which handles jurisdiction as it relates to corporate bankruptcy)
If you have any questions regarding the personal forms for bankruptcy, either Chapter 7 or Chapter 13, AmOne is here to help you find the answers. To learn about the options available to you, you can fill out our simple debt solutions form or you can call us toll-free at 1-800-781-5187 to speak with one of our financial search specialists.
Our financial search specialist will work with you and go over what bankruptcy means for your financial situation, as well as what your alternatives are. AmOne is open Monday through Friday from 9:00 AM to 9:00 PM and on Saturday from 9:00 AM to 5:00 PM Eastern time. Our free service helps you to find options for your debt situation so you don't have to file for bankruptcy protection.