Chapter 9 Bankruptcy Definition
Chapter 9 of the Bankruptcy Code in the United States is the chapter that contains provisions that protect distressed municipalities from creditors. Chapter 9 is one of the least popular chapters of the U.S code, this is because cases between municipalities and creditors do not occur frequently. Chapter 9 offers protection to municipalities such as towns, counties, cities, tax districts, municipal utilities, and school districts. This chapter allows a type of reorganization that allows distressed municipalities to pay back their debt while under bankruptcy protection.
A Little More on What is Chapter 9 Bankruptcy
The provision of Chapter 9 is quite different from other chapters of the bankruptcy code. This chapter prohibits the liquidation of assets belonging o municipalities. Municipalities are under the jurisdiction of the United States, hence, it is impossible to liquidate their assets in order to pay back the creditors. Given this provision, a bankruptcy court becomes inactive when it comes to a bankruptcy case involving a municipal.
Only municipalities are eligible to file for a Chapter 9 bankruptcy, the municipality must, however, meet the four requirements below;
- The municipality must be insolvent.
- The municipality must be authorized to file for Chapter 9 under the law of the state.
- The municipality must be willing to reorganize its debts.
- It must provide evidence of negotiation of good faith or an agreement with the creditors. If it is impossible to negotiate or obtain an agreement with creditors, it should also be stated.
Chapter 9 is not a popular type of bankruptcy, given that cases involving municipalities insolvency are rare. Chapter 9 helps municipalities on how they can reorganize or renegotiate repayment plan. This chapter also offers protection and relief to distresses municipalities, these include extending the period of repayment, reduction of principal or interest rate on the outstanding debt, and others.
In the history of the United States, Detroit is the largest city to file for Chapter 9 bankruptcy, Detroit also has the record of the largest municipal debt in the U.S with a total of $18.5 billion. Since 1937 when Chapter 9 was established, over 600 municipalities have used it.