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Friday, January 30, 2015

Bill Would Authorize Cities to File for Bankruptcy

Illinois State Representative Ron Sandack (R-Downers Grove) filed House Bill 298 this week to amend state statute to allow Illinois municipalities to seek bankruptcy protections under Chapter 9 of the U.S. Bankruptcy Code.  Chapter 9 allows for bankruptcy protection, but includes a provision that requires a municipality to gain state authorization as part of the filing. Currently, Illinois law does not allow for such authorization for municipal governments. 23 other states currently allow municipalities to file for bankruptcy, although there are few that have actually sought relief under Chapter 9.  

Before enacting this legislation, legislators should carefully consider the impact that municipal bankruptcies could have to all municipalities, taxpayers, and the public.  For example, a municipal bankruptcy could make borrowing money more expensive since bond buyers would have to price out the risk of the issuer (the municipality) declaring bankruptcy, affecting interest rates.  Contracts with municipalities could also become more expensive as contractors take into account the risk of not getting paid.  These impacts are likely to be felt by all municipalities, not just those that might file bankruptcy.  Illinois legislators should carefully study the effects these statutes have had in other states who have had similar legislation.

It's important to point out that the bill would only apply to municipalities, not other units of local government like counties, school districts, park districts, libraries, and townships.  

Here's the wording of the proposed legislation, which would amend the Illinois Municipal Code:
65 ILCS 5/8-1-19
Sec. 8-1-19.  Bankruptcy; petitions. Any municipality may file a petition and exercise powers pursuant to applicable federal bankruptcy law.
Post Authored by Adam Simon & Julie Tappendorf, Ancel Glink


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