Chapter 13 Bankruptcy

As this recession presses on many municipalities across the country are facing the prospect of Chapter 9 bankruptcy.  And while Chapter 9 bankruptcy is rare, only six have occurred in 2009 and 26 states forbid municipalities from filling bankruptcy, the issue has remained in the news.  But how does Chapter 9 bankruptcy impact ordinary citizens?

  1.  A city that files Chapter 9 bankruptcy may face spending/budgetary restrictions that will impact the type and quality of services being offered.  But over the long run, Chapter 9 bankruptcy could free up income by reducing debt and improve citizens quality of life.
  2. Right before a city files Chapter 9 bankruptcy, it is usually suffering a serious budget deficit, mounting debts and the inability to pay those debts.  Citizens may experience serious service cuts to education, police force reductions and even the closing of such essential public buildings such as fire stations.  But after a Chapter 9 bankruptcy, a city will be able to at least stop the financial bleeding and begin on the road to recovery.
  3. Chapter 9 bankruptcy can offer a city the opportunity to significantly reduce their debt and get a fresh start similar to an individual filing a personal bankruptcy.  Usually there have been mistakes made by those running the municipality and bankruptcy can help them indentify problems and implement feasible solutions. As a result, ordinary citizens may experience a high quality of life in that city after the municipality’s affairs are put in order by the bankruptcy.
  4. While Chapter 9 bankruptcy may make some investors wary of buying municipal bonds, other investors may see the bankruptcy filing as an opportunity to profit from a city that is undervalued.  After the bankruptcy, the city could experience a rush of investor interest which could create more funding for quality of life services.