As the name implies, an entity must be a municipality for
it to qualify for Chapter 9 bankruptcy. What exactly constitutes a “municipality,”
though? A “municipality” as defined by the U.S. Code is a “political subdivision or public agency
or instrumentality of a State.”
Common types of municipalities include cities, towns and
villages. Aside from this basic eligibility requirement, bankruptcy court has
more specific conditions for relief under municipality reorganization. To apply
for Chapter 9 bankruptcy, a municipality must be acknowledged by state law
to be a debtor and insolvent, must devise a plan to adjust its debts, and must
make an attempt to negotiate with creditors and gain their assent to the plan
outlined by city/town officials.
Filings under Chapter 9 are much less frequent than those
of Chapter 7 bankruptcy. This comparison in itself, though, does little to
indicate just how rare petitions for Chapter 9 bankruptcy might
be. In terms of absolute numbers, applications for municipality reorganization
are quite few indeed. Since this concept was made legal more than half a
century ago, less than 500 claims have been made under Chapter 9.
What is particularly notable about Chapter
9 bankruptcy is that the role of bankruptcy courts is much diminished in these proceedings. For one, the
mechanisms by which a court is assigned are notably different.
