What is Chapter 9 – Municipal Reorganization?

Chapter 9 is a specialized type of bankruptcy and reorganization that specifically applies to municipalities. Federal bankruptcy law allows a variety of municipalities that may take advantage of Chapter 9 proceedings, including cities, townships, counties, community college districts and school districts. The purpose of Chapter 9 is to establish a reorganization plan between a municipality and creditors for repayment of outstanding debt.

What Happens When a Municipality Files for Chapter 9 Bankruptcy?

Negotiated terms of Chapter 9 reorganization can offer a municipality many benefits including lowering interest rates and extending the debt terms to make repayment more attainable. In some cases, reduction of principal balances may also be proposed. Liquidation is rarely an option in municipal bankruptcies.

A Chapter 9 bankruptcy proceeding usually follows five main steps:

  • The local municipality files for bankruptcy, resulting in an automatic stay against debt collectors
  • The Court determines the municipality’s eligibility
  • The local municipality develops a Plan of Adjustment
  • The creditors approve the Plan of Adjustment
  • The Court approves the Plan of Adjustment

Municipal bankruptcy was first established in 1934 during the Great Depression and has been revised many times since that time. Since its inception, only about 500 municipal bankruptcy petitions have been filed, making this one of the rarest types of bankruptcies to be seen in courtrooms today. Because it is not commonly practiced, it is important to find legal representation from a firm that is experienced in this type of reorganization and familiar with the specific laws governing Chapter 9 bankruptcy in the state where it is filed.

How Does a Municipality File for Chapter 9 Bankruptcy?

Many local governments across the country are facing steep budget deficits and high debt. As a last resort, some of these municipalities have filed for bankruptcy. In order to file Chapter 9, a municipality must meet four basic requirements:

  1. The municipality must be authorized to file Chapter 9 under the laws of the state
  2. The municipality must be insolvent (unable to pay debts when they are due)
  3. There must be a desire by the municipality to adjust its debts
  4. The majority of creditors must be in agreement with the Chapter 9 proceedings

In addition, proper legal representation is a must to protect the interests of the municipality for the benefit of all parties involved. In addition to the different way in which these bankruptcy cases are handled, the complexities are multiplied due to the size of the municipality and the number of parties involved.

Does Marshack Hays LLP Offer Chapter 9 Representation?

Finding a legal team with experience in Chapter 9 bankruptcies can be easier said than done, given their relatively rare occurrence. Fortunately, California municipalities can find experienced legal help for Chapter 9 proceedings from the professional legal team at Marshack Hays LLP. Our bankruptcy attorneys have the special skill and experience to navigate these complex legal matters for the benefit of their clients. Previous Chapter 9 bankruptcy clients include:

  • County of Orange
  • City of San Bernardino
  • Vendor’s Committee – County of Orange (representation)
  • San Bernardino City Professional Firefighters Local 891 – City of San Bernardino (representation)

Our firm understands the challenges financially stressed municipalities face in reorganization planning prior to filing a petition. However, early planning is essential to ensure leverage is maintained for the benefit of bondholders, key vendors and unions. We work with all aspects of Chapter 9 proceedings to ensure they progress a smoothly as possible for everyone involved. When Chapter 9 is the only option, the experienced bankruptcy attorneys at Marshack Hays LLP are ready to help municipalities complete the reorganization process successfully.