What is Chapter 9?
Chapter 9 is a chapter in the bankruptcy code that specifically addresses the debts of a municipality, such as a city or town. The chapter allows the municipality to make a plan to pay off or adjust its debts while offering protection from creditors.
Chapter 9 of the bankruptcy code covers the needs of towns, cities, counties, school districts, municipal utilities, villages and taxing districts. Individuals and corporations are not eligible to file for a Chapter 9 bankruptcy. Chapter 9 is not available to states, either.
To qualify for a Chapter 9 bankruptcy, a municipality must meet four requirements:
- It must be insolvent.
- It must make a plan to reorganize or adjust its debts.
- It must get the agreement of a majority of its creditors, have failed to negotiate with the majority of its creditors or be unable to negotiate with its creditors.
- It must be authorized to be a debtor by a governmental officer or organization, or by state law.
The goal of Chapter 9 is to protect municipalities from creditors while they work to put together a plan to reorganize their debts. A municipality may reorganize its debts by refinancing, reducing the interest owed or the amount of the principal, or extending the repayment period of the debt.
Unlike under other chapters of the bankruptcy code, there is no liquidation of assets under Chapter 9.
Chapter 9 example
Since Chapter 9 was added to the bankruptcy code in 1937, around 10 Chapter 9 petitions have been filed per year. It’s much less common than other bankruptcies.
Some Chapter 9 bankruptcies have been noteworthy. In 1994, Orange County, California sought to restructure $1.7 billion in debt, the largest municipal bankruptcy declaration at the time.
In November 2011, Jefferson County, Alabama sought assistance in restructuring $4 billion in debt, which stemmed from an investment in a local sewage system that went wrong.
In July 2013, Detroit became the largest U.S. city to file Chapter 9 bankruptcy with an estimated $18 to $20 billion in debt and 100,000 creditors. The approved repayment plan for the city cut about $7 billion from its debt load.