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Chapter 9 Bankruptcy

Learn About Chapter 9 Bankruptcy Statistics

Learn About Chapter 9 Bankruptcy Statistics

Of all domestic bankruptcy options, bankruptcy statistics put forth by the United States Court system indicate that Chapter 9 municipality reorganization is by far the rarest. With less than 500 or 600 total cases processed since the passing of the Federal Municipal Bankruptcy Act in the 1930s, Chapter 9 bankruptcy receives even less petitions than Chapter 12 bankruptcy.         
The most recent bankruptcy statistics available for all bankruptcy options are those from the first three quarters of 2009. In that time, only six petitions for Chapter 9 bankruptcy relief were processed. The year before, a mere four were actualized. In fact, in the past three decades, the highest amount in any one year has been a mere 18 cases. In short, evidence indicates trends in Chapter 9 filings have stayed true to traditional form.
Seeing as there are so few Chapter 9 reorganization plans that actually go into effect, it realistically doesn’t make a large degree of sense to break down bankruptcy statistics by region. Besides, as each municipality is its own entity and may differ significantly from its neighbors, analyzing trends in geographic districts is of dubious merit. Of course, this assumes that Chapter 9 municipality reorganization is even one of the bankruptcy options open to a community. Some states (26 of them, to be precise) expressly forbid their composite municipalities from trying to balance its debts this way.
Lately, more and more municipalities have considered Chapter 9 among their bankruptcy options, especially with the experience of Vallejo so fresh in people’s minds. For example, the City of Harrisburg, Pennsylvania, the State’s capital, has contemplated such a measure in light of hundreds of millions of dollars in debt to programs as seemingly banal as its trash incinerator service. It goes without saying that numerous communities across the United States are feeling the pinch from the recession still gripping the nation. 

The Basic of Chapter 9 Governing Laws

The Basic of Chapter 9 Governing Laws

Concerns about bankruptcy were widespread among municipalities during the Great Depression. The first attempt at uniform law in 1934 to address municipal bankruptcy filing was ruled an unconstitutional violation of the Tenth Amendment by the Supreme Court. However, the 1937 Municipal Bankruptcy Act governing bankruptcy filing was allowed to stand.
Today, the United States Code has served as the place to go, so to speak, about bankruptcy discrepancies. Chapter 9 municipality reorganization is provided for under Title 11 of the Code, along with all other forms of bankruptcy.
Chapter 9 bankruptcy filing, as detailed by Federal law, saw its first major shake-up in the 1970s as a response to economic concerns in New York City and other existing imbalances of power between municipal debtors and bankruptcy courts that theretofore had not been adequately addressed. In 1975, the City of New York was thinking about bankruptcy as a recourse for its particularly lamentable state amid national trends toward inflation, high unemployment, and economic stagnation, sometimes referred to by the colloquialism “stagflation.”
Revising statutes on general bankruptcy filing that had been in place since the late 1800s, in 1976 Congress amended the Bankruptcy Act of 1898 to, among other things, allow municipalities a stay on creditor collections (as in other forms of bankruptcy) while they developed a plan to adjust their debts.
Arguably the last significant piece of legislation about bankruptcy under Chapter 9 in the United States was that of the Bankruptcy Reform Act of 1994. Just the same, its influence is still felt today. Along with establishing a National Bankruptcy Review Commission, the Act mandated that a State official/agency certify that a city, town or other municipality be eligible to file for Chapter 9 bankruptcy.

Quick Overview of Chapter 9 Filing Process

Quick Overview of Chapter 9 Filing Process

The decision of when to file for bankruptcy under Chapter 9 provisions is not one that a municipality should reach lightly. It may be possible that a community may try to exhaust all other debt reconciliation options before resorting to Chapter 9 bankruptcy. 
Along with when to file bankruptcy, a municipality must decide how exactly it will implement debt adjustment strategies in accordance with Chapter 9 bankruptcy standards. In return for receipt of bankruptcy assistance, a district will need to be active in trying to manage its deficits, employing solutions as it sees fit. Municipal debtors are usually given considerable latitude in this regard.
Possible answers to a region’s financial programs along these lines include raising taxes, renegotiating certain municipal contractual agreements and leases, delaying or cancelling raises and benefits for employees, and applying for new loans.
Barring accusations of wrongdoing and formal review, the final step of the filing process for bankruptcy assistance will usually be confirmation of an adjustment of debt plan by the bankruptcy court. This can by no means be assumed, however, as there are numerous conditions of eligibility to satisfy.
Among these conditions are the need for said plan to adhere to Chapter 9 constraints and overall U.S. Code Title 11 bylaws, all monies to be paid and incidental expenses in alleviating deficits are enumerated, all authorities required to give their assent have done so, and the plan (which, of course, must be realistic) must be in the “best interests” of creditors.    

Find Out Chapter 9 Purpose and Usage Before Filing

Find Out Chapter 9 Purpose and Usage Before FilingIndividuals with bankruptcy questions will obviously not need specific information on Chapter 9 bankruptcy, as this form of bankruptcy does not apply to them. For municipalities with bankruptcy questions (though arguably, they should have contingency plans and policies in place in the event of serious debt), though, knowing why Chapter 9 bankruptcy is on the books is not only prudent, but may be absolutely essential. As noted, this option is not that common in the United States, and so the usefulness of details on the subject may seem dubious.

For those students of the law, specifically bankruptcy law, though, their bankruptcy questions may yet come into play. Thus, for practical and academic reasons, it is worthwhile to know the precise reasons for municipality reorganization. Some considerations of the purpose of Chapter 9 bankruptcy in the reconciliation of debt:

Speaking of bankruptcy questions, not only may they come from debtors and average citizens with an interest in this topic, but they are bound to come from creditors looking to collect on their investments. For municipalities that cannot meet these demands, however, Chapter 9 bankruptcy may afford them some respite. Upon filing of a petition, creditors must cease collection actions under the doctrine of automatic stay.

Just the same, this does not mean cities and towns are automatically freed from responsibilities during this time. In addressing those bankruptcy questions, municipalities must take care to develop a direction for adjustments of their debts. This may involve debt refinancing through acquisition of an additional loan, negotiation of the principal or interest on an existing loan or loans, or extending the due dates (date of maturity) on repayment of those loans’ principals to their issuing creditors.

As with Chapter 7 bankruptcy, Chapter 9 bankruptcy may be defined in part by noting what it is not. Truly, there is a very direct comparison between these two chapters. While Chapter 7 bankruptcy is concerned with liquidation of assets to offset at least somewhat of what a debtor may owe his or her lenders, Chapter 9 expressly prohibits the liquidation of assets or dissolution of properties by a municipality.

In fact, liquidation is unconstitutional within municipality reorganization by virtue of it being a violation of the Tenth Amendment to the U.S. Constitution (powers not delegated to the federal government or prohibited of the states are thereby reserved by the states).

As for the role of the bankruptcy court in these cases, compared to other types of bankruptcy petition, it is noticeably smaller. In Chapter 9 bankruptcy court will generally only be permitted to approve applications and municipalities’ debt management plans, enforce the implementation of such recovery strategies, and serve a purely administrative function/forum for these issues to be heard.

All You Need to Know About Chapter 9

All You Need to Know About Chapter 9 As a municipality’s request for protection under Chapter 9 bankruptcy involves very public agencies and affects whole communities, it is reasonable that affected residents would want to have access to key bankruptcy information. Thankfully for their sake, the bankruptcy laws of the states and of the United States Code are amenable to these pursuits.

While some forms of bankruptcy may ensure that proceedings are confined to a secure, private location in the interest of protecting a citizen’s right to confidentiality, Chapter 9 municipality reorganization is a public matter, necessitating the free flow of bankruptcy information to various parties.

In fact, a good number of bankruptcy laws relating specifically to Chapter 9 deal with this subject. For the reader then, here is some useful bankruptcy information regarding the requisite transparency of the Chapter 9 bankruptcy application process:

Bankruptcy laws contained in the language of the United States Code state require notice of an intent to pursue a Chapter 9 bankruptcy must be given not only to identified creditors, but to the people that dwell within the petitioning jurisdiction.

These laws expressly specify that a clerk or other appointed person must issue notice, along with at least one newspaper “of general circulation”, at least once a week, and for at least three weeks in sum.

The court presiding over a Chapter 9 case may also designate other newspapers to post such bankruptcy information (notably those that will be read by bond dealers and holders) and require that interested parties be notified through the mail.

Especially when issues arise over certain contents of this bankruptcy information, once more detailed by federal bankruptcy laws, the community has the authority, and arguably, the duty, to put forward its objections to a plan of action. Before a Chapter 9 bankruptcy order goes into effect, hearings will often be held where community members with a vested interest in proceedings may air their grievances in a public forum.

Among the parties that may have a legitimate concern regarding these happenings are municipal employees, townspeople, property owners, taxpayers, banks and other financial institutions.

Of course, we would be remiss if we did not consider the viewpoints of the creditors and the bankruptcy court, who definitely need to have access to important bankruptcy information.

Bankruptcy laws furthermore dictate that said parties may raise objections to a debt adjustment plan or the move to declare Chapter 9 bankruptcy itself. Especially if a petition is accused of being made “in bad faith” or judged that way, bankruptcy proceedings will not be allowed to pass. 

Chapter 9 Bankruptcy

Chapter 9 Bankruptcy

Chapter 9 bankruptcy's low usage in the United States may belie the scope and severity of the program for those municipalities that use this type of relief. Chapter 9 municipality reorganization requires much effort on the part of town/city officials and the full cooperation of the community.

Leading into bankruptcy court, the cooperation of debtors, creditors, trustee, and court officials is of paramount concern. Potentially, millions of dollars and numerous jobs may be at stake, so districts must be sure they are ready for the consequences and prepared to accept the idea that not everyone will see a plan as beneficial. Contact bankruptcy lawyers for legal advice and assistance.

General

Rather than a person or business looking to liquidate owned assets and properties as in Chapter 7 bankruptcy, Chapter 9 bankruptcy is specifically for use by municipalities.

Purpose and Usage

Though the infrequency of Chapter 9 municipality organization is well noted, it is still prudent for cities and towns to know the reasons surrounding its use in the United States as part of a budgetary contingency plan. For municipalities that cannot manage their debts as they exist, Chapter 9 bankruptcy allows them to restructure their financial obligations, and in doing so, protects them at least temporarily from the collection actions of creditors via provisions of automatic stay in the Bankruptcy Code.

However, this involves the active participation and cooperation of municipal officials in devising and adhering to a workable plan of addressing deficits. In terms of specific strategies, this may involve refinancing existing loans, extending the date of maturity (date by which debts must be paid) on these loans, or taking out a new loan altogether.

The fact that Chapter 9 municipality reorganization is an "adjustment of debt" strategy as opposed to a wholesale liquidation of assets as in Chapter 7 is an important note in defining its purpose. In fact, to do otherwise would be to violate the Tenth Amendment and the rights of states to have control over their own affairs.

Going back to the purpose of bankruptcy courts in Chapter 9, their functionality is greatly reduced, but this does not imply it is absolutely null. A bankruptcy court judge and other staff collectively will approve reorganization plans and serve debtors with notice that are not meeting the terms of those agreements. 

Useful Information

While individuals applying for bankruptcy may understandably want the events surrounding their financial struggles to be as private as possible, Chapter 9 municipality reorganization must be anything but, with a potentially long list of creditors existing for major cities and residents' livelihoods potentially hanging in the balance. With assistance from bankruptcy courts, notice must be given to all parties interested in these affairs.

For the general public, this must be issued at the very least in the form of a widely-circulated newspaper, as well as in periodicals likely to be read by bondholders. Printed notices may also be sent to creditors through the mail through the court.

The community to be affected and the creditors seeking to recoup loaned monies reserve the right to review municipal officials' plans for overcoming the city/county/town/village's debt before they go into action. Concordant with this notion, residents must be given a public forum by which to raise their objections to the adjustment strategies outlined by department heads, and creditors must be given recourse to protest if they feel that a municipality is not doing its due diligence in meeting its obligations, is going about doing so unfairly to certain lenders, or is otherwise acting "in bad faith" in its petition. 

Legal Implications

Irrespective of alleged wrongdoing, bankruptcy is a function of the U.S. Court system, and by virtue of this, entanglements with the law cannot be denied. That said, proceedings stand to get more heated if key Chapter 9 principles are violated in some way. Rather than debts being discharged or plans approved, they can be dismissed or even litigated against.

One such grounds for dismissal of a Chapter 9 case is inaction on the part of the petitioning municipal debtor. Effectively, in such an instance the case is just canceled out. A debt adjustment scheme and the corresponding application may also be tossed out if it is judged to be discriminatory towards certain creditors. Additionally, municipalities may be held as non-compliant with their own agreements.

As noted, a critical condition for the acceptance of a municipality reorganization agenda is the idea that it is made "in good faith" (e.g. that it is genuine and honest) and that it is organized in the "best interests" of creditors. After all, it is the municipalities who owe something to those agencies who have offered their assistance. For such an agenda to be approved (or "confirmed", as it is also known) by the court, Chapter 9 reorganization must be the most applicable bankruptcy option there is, as opposed to Chapter 11 business reorganization.

Noted Chapter 9 Usage

Chapter 9 filings rarely go unnoticed beyond the towns and cities they affect. For particularly big cities, in fact, the nation and world may take notice, especially since municipality bankruptcy is so rare. Certainly, the rash of debt that sprang up amidst the Great Depression and the subsequent attempts of the U.S. government to create laws addressing municipalities' financial woes must be noted for posterity's sake.

After early attempts to write uniform legislation on the subject were declared invalid by the Supreme Court through its ruling in 1938's United States v. Bekins as violating the Tenth Amendment to the Constitution, the Court confirmed the right of bankruptcy courts to hear cases on districts applying for relief from mounting debts.

In the decades since passage of Federal laws on municipal bankruptcy and judgments of their constitutionality, quite a few prominent cities have either been close to applying for Chapter 9 bankruptcy, have withdrawn their claim, or have actually gone through with it.

Bridgeport, Connecticut, Cleveland, and New York City all had major money issues at points in the past three decades, and Vallejo, California (via its city council) found itself unanimously in favor of declaring bankruptcy in 2008. Perhaps the most famous and certainly biggest Chapter 9 filing in American history, though, belongs to Orange County, California following criminally irresponsible investments of public funds. 

Governing Laws

The Federal laws governing municipal bankruptcy are well established and codified in the United States. Chapter 9 bankruptcy law as we know it owes a lineage to the Municipal Bankruptcy Law of 1937, a response to the widespread economic downturn of the Depression era. Concurrent with the financial crisis of New York City in the mid-1970s that nearly brought it to a declaration of insolvency, municipal reorganization was dramatically altered to be more reflective of how it is contained in Title 11 of the U.S. Code today. 

Filing Process

In proceeding with Chapter 9 municipality reorganization, communities must know and follow proper procedure. Right off the bat, municipalities must formally request Chapter 9 bankruptcy as a course of action and must specify and notify creditors in doing so. Residents must also be apprised of a district's plans and must be heard regarding their views on specific strategies to combat debt in their region, which may take the form of tax hikes, job cuts, deferment of benefits to retirees, delay of scheduled raises, new loans, and termination of contracts and leases not specifically tied to monies owed.

Municipalities are given much leeway by the courts in the formation of their plans. Before all is said and done, confirmation of a debt adjustment plan by creditors and court must take place. With any Chapter 9 case, there are a number of narrowly defined conditions for acceptance of an adjustment plan. Plans must abide by Chapter 9, Title 11 guidelines, must spell out all additional expenses occurred in implementation, and must meet the needs and interests of lenders.

Statistics

Statistically speaking, Chapter 9 municipality reorganization is the least common of all domestic bankruptcies, accounting for less than 1,000 petitions in its history. As of the most recent available statistics, a mere ten petitions were filed in the United States in the last two years, and over the past 30 years, 1991 marked the peak year for Chapter 9 filings, with a still none-too-impressive total of 18.

These low rates may be in part due to the fact more than half of states do not expressly  permit their constituent municipalities to file for Chapter 9 bankruptcy. All the same, trends in Chapter 9 relief amid America's desperately ailing economy suggest numbers may be on the rise. Even capital cities like Harrisburg, Pennsylvania – which faces hundreds of millions of dollars in debt to creditors – has had to consider this option.    

Bankruptcy law presumes that all applications for relief under Chapter 9 of the Bankruptcy Code are made "in good faith," meaning that they are in accord with accepted moral standards, or in other words, honest, genuine petitions. However, this assumption must be tested by the scrutiny of creditors' bankruptcy lawyers and the appointed bankruptcy court at large. If a claim is judged to not be a bona fide request, that alone is grounds for dismissal. A municipal organization or entity might also try to appeal to Chapter 9 protections, but the court may argue that they are better suited for help from provisions relating to another bankruptcy type, most likely Chapter 11 bankruptcy.

Bankruptcy law, too, mandates that debtors be active in moving bankruptcy court proceedings forward with all due alacrity and fairness. Failure to comply in these regards may also be cause for dismissal. If petitioning municipalities in Chapter 9 cases are unreasonably slow to respond to the requests of certain creditors, delay in coming up with a viable debt adjustment plan, or act in a way contrary to named conditions of an adjustment plan agreement between debtor and creditors, their bid for relief may fall short due to their inability to follow proper procedure.

The goal of the petitioning party in any Chapter 9 bankruptcy trial is a balance of all monies owed to lenders or a discharge of those debts. Even after a full repayment or discharge has been confirmed, though, provisions of bankruptcy law allow for this decision to be reversed with evidence it was reached based on fraudulent information. In this case, the bankruptcy court will serve municipal officials with a notice of review, and pending the subsequent hearing, may overturn the confirmation. 

 

Noted Chapter 9 Usage to Consider

Noted Chapter 9 Usage to Consider

When a town, major city or county intends on filing for bankruptcy, it is not just a proverbial blip on the radar. Bankruptcy filings by municipalities under Chapter 9 municipality reorganization are matters of interest to their entire population, if not matters of state, national and international interest, especially given their rarity.
Within the United States, a number of prominent districts have wound up filing for bankruptcy, forcing Americans to pay attention to the reality that political subdivisions do not possess an infinite amount of funding and resources, which, in good times, may be somewhat of an afterthought.
What’s more, given the economic hardships in our nation in the late 2000s and early 2010s and the rise in bankruptcy filings for individuals (which arguably were already too high), we may see yet more occurrence of this phenomenon in major cities. The following are some notable examples of municipalities filing for bankruptcy under Chapter 9:
Of course, the very bankruptcy filings that gave rise to the institution in the first place are notable. The first instances of municipalities filing for bankruptcy in America arose in 1934 in the wake of the Great Depression and widespread failures of towns and cities across the country to cope with this period of downturn.
However, the Act drafted by Congress that provided for the creation of municipality reorganization/debt adjustment plans was found to be unconstitutional by the Supreme Court (i.e. a violation of the Tenth Amendment) as a result of the case Ashton v. Cameron County Water Improvement Dist. This decision was effectually reversed, however, with the creation of the Municipal Bankruptcy Act in 1937 and the ruling of the Court in United States v. Bekins in 1938.
As noted, though, only a few hundred bankruptcy filings under Chapter 9 have been reported since that time. Those that were reported were thus all the more significant. Bridgeport, Connecticut, the most populous city in the State, for one, found itself filing for bankruptcy in 1991 only to withdraw its appeal for relief. Vallejo, California – a city of 100,000-plus people – actually went through with the process in 2008. These examples stand in addition to all the of the occasions that almost led to bankruptcy filings, namely the financial crises of New York City in 1975 and Cleveland in 1979.
By far the biggest municipality to end up filing for bankruptcy in recent memory is that of Orange County in California in 1994. The county was forced to file for Chapter 9 bankruptcy after treasurer Robert Citron, without proper oversight, lost billions of dollars to high-risk investments of public funds. Citron, imaginably, lost his job and plead guilty to multiple counts of fraud. It would not be until 1995 that bankruptcy status would cease to apply to Orange County.