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.