Financial Restructuring & Bankruptcy

Municipal Insolvency

Chapter 9

What is Chapter 9?

Chapter 9 provides for the reorganization of a municipality's financial affairs—also known as the adjustment of its debts. Similar to Chapter 11 (the most commonly used bankruptcy vehicle by non-governmental debtors), Chapter 9 provides municipalities with a breathing spell from creditors so they can formulate plans for an adjustment of debt acceptable to a majority of creditors.

Differences between Chapter 9 and Chapter 11 are:

  • Only debtors that are insolvent governmental or quasi-governmental entities may use Chapter 9.
  • Chapter 9 has no provisions enabling liquidation of a debtor.
  • There are a number of Chapter 9 provisions that affect the balance of power among debtors and creditors differently than those found in Chapter 11.
  • The Tenth Amendment of the U.S. Constitution places limitations on the involvement of bankruptcy courts that oversee the debt adjustment process in Chapter 9 filings.

State laws regarding authorization for Chapter 9 filings vary widely. Currently, 26 states authorize municipality Chapter 9 filings and 24 states, in addition to Washington, DC, do not. In addition, some states limit the types of municipalities that may file while others permit filing subject to a preliminary review by the particular state.