Chapter 9 Bankruptcy For Municipalities

Many people are familiar with personal bankruptcy cases, which are known as Chapter 7 and Chapter 13. Chapter 7 allows an individual to eliminate their debts, while Chapter 13 repays the debts through a structured payment plan. Both types can provide financial relief while protecting a person's assets. In business, bankruptcy protection is offered through either a Chapter 7 or through a Chapter 11 restructuring process. A business can opt to close the business and liquidate its assets in efforts to satisfy their debts through Chapter 7, or may remain in operation and reorganize their debts through a Chapter 11 repayment plan. But what happens to bigger entities when they become overburdened by debt?

What Is Chapter 9 Bankruptcy?

A Chapter 9 bankruptcy provides debt restructuring and asset protection to cities, or municipalities. When a city government becomes overburdened by debt, they have the option to reorganize their funds and develop a debt repayment plan. There is no liquidation option available to municipalities and the hardest part of a city entering into bankruptcy is the debt negotiation process. All of the creditors want to stake their claim to monies being repaid and coming to an agreement with so many creditors at once can often be difficult. Even further, cities are still responsible for paying bills, funding programs and keeping the city profitable. When a municipality seeks bankruptcy, their mission has to be less about the creditors and focused more towards the citizens.

Chapter 9 Benefits

A financially strapped city has many challenges ahead; fortunately, Chapter 9 offers many benefits to resolving their debts over managing the problems alone. As in any bankruptcy case, a Chapter 9 will issue an automatic stay order, which will cease all collection efforts. Many times, cities get flooded with lawsuits by creditors when they cannot pay their debts. More lawsuits equal more money and, therefore, more debt. Chapter 9 puts a stop to collections and prohibits creditors from filing any further lawsuits.

In Chapter 9, the city holds the negotiating power, not the creditors. The repayment plan must be developed by the municipality and submitted to the creditors. Creditors are not allowed to submit their own plans for repayment. Also, there is very little interference from the bankruptcy court in a Chapter 9 case, which can facilitate the process much faster. The court also cannot force the city to sell assets, obtain a trustee or dictate much of how the Chapter 9 plan will work.

In the event the city needs to cut funding or increase revenue, a Chapter 9 plan allows them to change, or amend, municipal contracts. This includes union contracts, labor contracts and can reduce city expenses. However, this usually comes at a cost as the pension or benefits of such contracted workers are reduced in these contractual changes.

Chapter 9 Disadvantages

As in any bankruptcy case, even a Chapter 9 has a few minor pitfalls. Obtaining a discharge in Chapter 9 can be difficult as the eligibility criteria can be restrictive. Furthermore, successfully completing a Chapter 9 can be expensive when high-priced counsel is used. Municipalities often leave with a compromised credit standing and acquiring new sources of credit can be difficult. Many times, cities are forced to turn to private investors to help them "get back on their feet" after a Chapter 9.

The Lee Law Firm aims to provide local residents with high quality legal representation at affordable rates. Their attorneys specialize in all aspects of Chapter 7 and Chapter 13 Bankruptcy. As bankruptcy lawyers in Dallas, the Lee Law Firm attorneys understand the pressures their clients face as the battle a financial hardship.