Chapter 9 bankruptcy stands out of a crowd as it is designed only for municipalities. If the certain municipality faces financial hardship and is unable to meet its obligations, such municipality may file for bankruptcy under the Chapter 9. The reason for filing for bankruptcy is to become protected from the municipality’s creditors and their claims and win the time to readjust the pool of debts. The bankruptcy provides a municipality with a chance to get back on track and direct all efforts on reviving all processes.
Chapter 9 which was created by the Congress in 1937 protects municipalities from being shut down by creditors’ claims. The petition with the debts reorganization plan must be approved by the U.S. court. After the petition is approved, creditors have no legal rights to disturb the debtor.
The essence of Chapter 9
Unlike Chapter 7 bankruptcy where all debtors’ valuable assets become liquidated and sold out, Chapter 9 allows a municipality to keep everything it owns. Moreover, a municipality, by getting the court’s protection, wins time to sort out financial troubles and pay off the debts later.
Bankruptcy under the Chapter 9 is only possible which the well-developed and approved by the court a debt restructuring plan. The plan includes the detailed description of all debts and the plan how to repay each loan (with mentioning planned sources of income) during a certain period of time.
The repayment plan also means the reduction of interest rate on current loans in order to make it easier for the debtor to cope with the debt. Anyway, the municipality must match several criteria to be eligible for Chapter 9 and the first and foremost one, it must have a desire and possibilities to reorganize its debts in a manner that it will be possible to pay the debt off in the future.
Who can qualify for Chapter 9 bankruptcy?
Only municipalities can file for Chapter 9 bankruptcy. According to the Bankruptcy Code definition, a municipality is “a political subdivision or public agency or instrumentality of a State”. It can be a city, a village, a county, a school or taxing district and so on.
In order to qualify for Chapter 9, a municipality must be insolvent. The municipality must also be authorized for filing for Chapter 9, otherwise, the process is impossible.
The municipality must have professionally developed repayment plan which all creditors agree with. It’s vital to obtain an official Agreement with major creditors where they agree with starting the bankruptcy process. In some cases, the bankruptcy can be approved without creditors’ agreement, when the debtor provides the court with the clear evidence of failed attempts to negotiate with creditors.
Benefits of filing for Chapter 9 bankruptcy
The municipality that files for bankruptcy under Chapter 9 does not, in fact, go bankrupt. Instead, it gets extended time to repay debts at a considerably lower interest rate. Besides, a municipality may not terminate its activity as the assets stay intact.
Bankruptcy for municipalities is a perfect and timely protection from distressful actions of creditors who want their loans paid off immediately.
Take a note, that Georgia is the only state in the U.S that does not permit its municipalities to seek protection from creditors by filing for Chapter 9 bankruptcy.
Chapter 9 is the rarest among all bankruptcy chapters. Statistically, about 10 bankruptcies per year are registered under the Chapter 9. Basically, it was only 620 bankruptcy cases since the Code was invented by the Congress in 1937. Compare it with more than 418.000 bankruptcies under the Chapter 13.