The United States Bankruptcy Code Title 11 and Chapter 9 are used by municipalities to file for bankruptcy. Chapter 9 is a federal government system for helping municipalities resolve their debts, and it has been amended several times in an attempt to avoid infringing the sovereign rights of states. Under Chapter 9, municipalities are protected from lawsuits and judgments are awarded to creditors in order to negotiate debt settlement. Eligible municipalities are broad in scope and may include counties and school districts, as long as they’re controlled by the state. Bankruptcy courts have limited power when handling Chapter 9 cases. They cannot interfere with a municipality’s rights to use its property, and they cannot meddle with its revenues.
Chapter 9 differs from other bankruptcy provisions because municipalities are often shielded by law from liquidating their assets and distributing the proceeds to creditors. The federal bankruptcy courts have many more restrictions and limitations because of the Tenth Amendment to the United States Constitution, which prohibits federal infringement of state sovereignty. If a federal bankruptcy court were to force municipalities to liquidate their assets, then it could be viewed as a Tenth Amendment violation. This is the same reason why bankruptcy courts are often prohibited from dissolving municipalities as a resolution to a Chapter 9 filing. The three duties of a bankruptcy court in these cases are often to grant the municipality petition, approve a plan for debt settlement, and confirm that the plan is being implemented.
Municipalities may initiate a case by filing a petition under the bankruptcy code. They often are also required to submit a list of creditors and the required details about the debt with the petition or at another time as directed by the bankruptcy court. The chief judge of the court of appeals will often assign a bankruptcy judge to the case once the petition is filed. In other bankruptcy cases, the court clerk has the responsibility of assigning cases. The clerk often remains responsible for giving creditors and others notice of the Chapter 9 filing, which includes placing a notice in the local newspaper for a prescribed period of time.
Creditors are often more limited in a Chapter 9 bankruptcy than in other bankruptcy filings. For example, creditors are not allowed to propose plans that compete with what the municipality proposes. The municipality plan is often imposed on creditors, even if they disagree with it. The bankruptcy court cannot interfere with the municipality operations during the bankruptcy process.