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Chapter 9 Bankruptcy Overview

Chapter 9 Bankruptcy is for municipality bankruptcy. It helps municipalities restructure their finances.

Eligibility for filing Chapter 9 Bankruptcy

Municipalities are political subdivisions, public agencies, or another instrumentality of a state, in other words a town or city.

A municipality must satisfy the following requirements in order to file for Chapter 9 relief:

  1. It must have specific state authorization to be a debtor under Chapter 9.
  2. It must be insolvent.
  3. It must have proposed a plan to restructure its debts.
  4. It must meet one of following four criteria:
    • It must have obtained the consent of at least a majority of the impaired claimholders under the proposed plan.
    • It must have tried to negotiate with a majority of the impaired claimholders under the proposed plan but has failed to reach any agreement.
    • Negotiation with claimholders is impractical.
    • It has reasonable grounds to belief that a creditor may try to obtain a payment preference.

How does it work?

Chapter 9 Bankruptcy is similar to Chapter 13 Consumer Bankruptcy. When a municipality files for Chapter 9 Bankruptcy, it intends to create a repayment plan that is acceptable to the municipality and its creditors. Moreover, it also protects the municipality against creditors until an amenable repayment plan is reached.

A repayment plan is usually created through negotiation with the creditors. Negotiation may include debt reduction, slashing of interest rates, or extending loan terms. Refinancing debt can also be done during Chapter 9 bankruptcy.

Chapter 9 is primarily used by school districts, water districts, and hospital districts to reorganize their finances. There have been less than 500 municipal bankruptcy filings since 1937 when the Bankruptcy code was amended to permit municipality debt restructuring.

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