Chapter 9: Municipal Bankruptcy


May 9, 2012 - Amanda Wright

Most people have some understanding of what it means if they or someone they know declares bankruptcy. But are you aware of what the consequences would be if your city were to declare bankruptcy? Despite recent improvements to the economy, both in Michigan and nationwide, cities remain under intense fiscal stress, with many looking at bankruptcy as a possible solution.

Cities facing a financial emergency from chronic fiscal stress need to understand Chapter 9 municipal bankruptcy. While not a cure for fiscal  stress, Chapter 9 is a tool that a municipality may use to reset its financial course when all other methods fail. Several lessons learned through a simulation exercise using live case data prove beneficial to those charged with municipal fiscal health. From a legal perspective, the exercise revealed a need to address  common misconceptions about Chapter 9. From a financial perspective, strategically planning to avoid a bankruptcy increases transparency while working  through a checklist of alternatives. If those alternatives fail, the city is in a reasoned position to seek Chapter 9 relief.

A introduction to Chapter 9 municipal bankruptcy, including eligibility, requirements, creditor negotiation tests, the plan of adjustment, Chapter 9 vs. Chapter 11 and the advantages and disadvantages of a municipality filing for Chapter 9 bankruptcy.


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