Individuals 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.