United States Bankruptcy Law Chapter 9

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Chapter 9 of the Title 11 of the United States Code

Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. Most famously, Chapter 9 was used by Orange County, California in 1994 to adjust its debts.

Deeper Look at Chapter 9

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities. The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District; however, a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX). Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis. The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.

To prevent overlap Chapter 11, 11 USC 101(41), of the US Bankruptcy code defines the term "person" to exclude many so called "governmental units" as defined in 11 USC 101(27).

Since 1937, there have been fewer than 600 municipal bankruptcies in the USA.

Features of Chapter 9 Bankruptcy

While in many ways similar to other forms of bankruptcy reorganization (Chapters 11, 12, and 13), Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of Congress to adjust their debts through bankruptcy is limited considerably by the 10th Amendment.

Chapter 9 Collective bargaining

Municipalities' ability to re-write collective bargaining agreements are much easier than in a corporate Chapter 11 bankruptcy and can trump state labor protections allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.

"Congress did not extend the same projection [sic] to public employees that it did to those working in the private sector under Chapter 11 bankruptcy rules."

Some states do not permit Chapter 9 filings without authorization

A municipality in some states must seek enactment of a specific statute particular to it authorizing the filing.

New Jersey, Connecticut, and Kentucky simply give a state appointed official or body the power to approve a filing

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