A nearly 90-year-old chapter of the US Bankruptcy Code created to aid cities and other municipalities in restructuring their debt remains rarely used and difficult to access due to stringent eligibility requirements. Since its enactment in 1937, only about 700 Chapter 9 cases have been filed, a stark contrast to the thousands of corporate Chapter 11 cases filed annually. This disparity highlights the formidable barriers municipalities face when considering Chapter 9 as a solution to financial distress.
The infrequent use of Chapter 9 can be attributed primarily to the insolvency standard municipalities must meet to qualify for this type of bankruptcy. According to experts, these stringent requirements serve as a significant deterrent, preventing many debt-laden municipalities from using this tool. Furthermore, political dynamics often compound these challenges, making the decision to file for bankruptcy even more complex and contentious.
A notable example, however, was the city of Detroit, which emerged from its historic bankruptcy a decade ago. The city’s case stands as an outlier and serves as a reference point for other municipalities contemplating similar actions.
For more details on the challenges and intricacies of Chapter 9 bankruptcies, visit the full article on Bloomberg Law.