DEFINITION of 'Chapter 9'

Chapter 9 is a bankruptcy proceeding that provides financially distressed municipalities with protection from creditors by creating a plan between the municipality and its creditors to resolve the outstanding debt. Municipalities, as defined for Chapter 9 bankruptcy proceedings, includes a wide variety of governmental entities such as cities, counties, townships, municipal utilities, taxing districts, and school districts.

BREAKING DOWN 'Chapter 9'

It is nearly impossible for a creditor to force the liquidation of a municipality's assets. Chapter 9 significantly differs from other bankruptcy chapters in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. A municipality is defined by its state and is under state jurisdiction. The Tenth Amendment to the Constitution states that any powers not defined in the Constitution are reserved for the state, which has sovereignty over its internal affairs. Bankruptcy proceedings are part of the U.S. bankruptcy courts, which are under federal jurisdiction. Therefore, the federal courts cannot force a municipality to liquidate. In effect, the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under Chapter 11.

The role of bankruptcy court in Chapter 9 proceedings are limited and focused on approving a plan of debt reduction and overseeing the execution of the plan. Only municipalities may file for Chapter 9 bankruptcy. Four other eligibility requirements for Chapter 9 as set forth in Section 109(c) of the Bankruptcy Codes are:

  • the municipality must be specifically authorized to file for Chapter 9 under state law;
  • the municipality must be insolvent;
  • the municipality must desire to effect a plan to adjust its debts, and;
  • the municipality must obtain agreement of the majority of certain types of creditors or, if no agreement, have evidence that an attempt to negotiate in good faith was made or that it would be impractical to negotiate or obtain an agreement with creditors

Before a municipality can file for Chapter 9, it must have made an effort to negotiate with its creditors. The intent of Chapter 9 is to negotiate a repayment plan between the municipality and creditors, which can include reducing the principal or interest rate on outstanding debt, extending the term and timeline of the loan repayments, and refinancing the debt by obtaining a new loan. The whole process can last from a few months to a few years, depending on the complexity of the case and the amount of debt.

As with Chapter 7 and Chapter 13, the filing of a Chapter 9 reorganization triggers an automatic stay, which stops all collection actions against the municipal debtor. Under certain circumstances, the stay also protects officials of the municipality.

In 2013, Detroit became the largest city in U.S. history to file for Chapter 9 bankruptcy, carrying the largest municipal debt ever (estimated at $18.5 billion) to be considered by the courts.

 

RELATED TERMS
  1. Municipal Bond Fund

    A municipal bond fund is a fund that invests in municipal bonds.
  2. Municipal Investment Trust

    A municipal investment trust is a type of unit investment trust ...
  3. Corporate Debt Restructuring

    Corporate debt restructuring is the reorganization of a distressed ...
  4. Creditors' Committee

    A creditors' committee is a group of people who represent a company's ...
  5. Creditor

    A creditor is an entity that extends credit by giving another ...
  6. Net Debt to Assessed Valuation

    Net debt to asset valuation measures a municipality’s net debt ...
Related Articles
  1. Investing

    The Top 5 Municipal Bond ETFs for 2016

    Learn about exchange-traded funds that invest in municipal bonds issued by local U.S. municipalities with returns on bonds exempted from federal tax.
  2. Investing

    Municipal Bonds Vs. Money Market Funds

    Municipal bonds are a loan from you to a state or local government or authority; money market funds are a type of mutual fund.
  3. Investing

    5 Popular Municipal Bond ETFs in 2016 (MUB, SHM)

    Learn how the five most popular national municipal bond ETFs can generate income that is exempt from state taxes, as well as AMT in certain circumstances.
  4. Investing

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  5. Investing

    Foreign Investors Flock to U.S. Municipal Bonds

    Interest in U.S. municipal bonds by foreign investors is on the rise. Here's why.
  6. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  7. Investing

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  8. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  9. Financial Advisor

    Top 4 Municipal Bond ETFs (TFI, MUB)

    Explore analyses of four popular ETFs that track the municipal bond market, and learn how these ETFs are beneficial to investors in high tax brackets.
  10. Investing

    3 Best High-Yielding Municipal Bond Mutual Funds

    Discover the benefits of including municipal bond funds in your investment portfolio and learn about three high-yielding municipal bond mutual funds.
RELATED FAQS
  1. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Answer >>
  2. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center