DEFINITION of 'Chapter 9'

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 include cities, counties, townships and school districts.

BREAKING DOWN 'Chapter 9'

The purpose Chapter 9 is to negotiate a repayment plan between the municipality and creditors, which can include reducing the outstanding debt or interest rate, extending the term of the loan and refinancing debts.

It is nearly impossible for a creditor to force the liquidation of a municipality's assets. A municipality is defined by its state and is under state jurisdiction. The 10th Amendment states that any powers not defined in the Constitution are reserved for the state. Bankruptcy proceedings are part of the of the U.S. bankruptcy courts, which are under federal jurisdiction. Because bankruptcy proceedings are not a part of the constitution, the federal courts cannot force a municipality to liquidate.

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