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Municipality restructuring in Chapter 9

HomeBankruptcyMunicipality restructuring in Chapter 9

Before going into the details of the same, it will be imperative to understand what Chapter 9 is all about!

1. Chapter 9 is a provision of United States federal bankruptcy law.

2. It governs how municipalities can declare and resolve bankruptcy.

3. It enables legal protection to the municipalities, which in turn allows them to again fabricate or restructure and thus    become more secure financially.

The following protections are involved in this:-

  • An automatic stay-

it suspends the debt payments of municipalities, during the debt negotiation procedure. There is not additional interest due during the same. This measure is designed to provide protection from the creditor’s claims.

  • Limited federal bankruptcy court oversight-

In this the court can only approve or deny municipality eligibility. It can accept or reject the restructuring plan of a municipality debt. Also, it can provide oversight during the implementation of a plan.

  • Appointment of local judge-

This ensures that the presiding judge does not have any sort of political conflict of interest. And hence, the chief judge of the Court appeals in the district, which is the location of the bankruptcy court.

  • Bankruptcy exit plan-

Here both the municipality and its creditors need to agree to the plan. However, the municipality controls the final submission.

How can a municipality qualify for Chapter 9?

The following criteria are of significance for a municipality to qualify for the Chapter 9:-

  • If the municipality is unable to pay its debts when they are due.
  • If the municipality is authorized by the state law to file for the Chapter 9 bankruptcy.
  • If the municipality is voluntarily seeking to find resolution of its debt.
  • It the municipality has already made the effort to avail restructuring agreements with its creditors.

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