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Municipal Reorganization

Chapter 9 What is it?

Chapter 9 provides an opportunity for troubled municipalities to restructure their debts. There is no automatic appointment of a trustee in a Chapter 9 case; accordingly, the municipality continues its governmental and business affairs in the same fashion as it did prior to the bankruptcy. Chapter 9 is also geared toward the development of a plan of reorganization.

Who Can be a Debtor?

Only municipalities may file under Chapter 9. Municipalities are generally any governmental or quasi-governmental body whose revenues are derived from taxes or assessments (cities, counties, school districts, water districts, etc.). The Bankruptcy Code prohibits a municipality from filing a petition under Chapter 9 unless it is “specifically authorized” to do so under state law. In other words, the Bankruptcy Code allows states to determine the conditions under which their municipalities may file bankruptcy. Many states have required their municipalities to go through state-mandated debt restructuring programs before they may file a Chapter 9 petition. Chapter 9 also requires that the municipality be “insolvent” which, in this case, means that the municipality is not paying its debts as they become due.

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