Detroit's Bankruptcy Filing Rare Use of Chapter 9
The United States Courts website posted an interesting story about municipal bankruptcies in the U.S., following yesterday's decision by the City of Detroit's to declare bankruptcy. Detroit filed under Chapter 9 of the Bankruptcy Code. That section provides for reorganization of municipalities, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 9 filings are pretty rare. From 1991-2012 there were 217 Chapter 9 bankruptcies filed nationwide, with 20 filed in 2012. The majority of these cases involved utility districts and not municipalities. This map indicates generally where these Chapter 9 bankruptcies were filed from 1991 to 2012.
The purpose of Chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
Chapter 9 is significantly different from other chapters in the Bankruptcy Code in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors.
You can learn more about Chapter 9 and bankruptcy basics on the uscourts.gov website, and I'm sure we are going to hear a lot more about municipal bankruptcy in the coming months.
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