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. Wage Earner Plan (Chapter 13 Bankruptcy)

    A wage earner plan (Chapter 13 Bankruptcy) enables individuals ...
  2. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  3. Bankruptcy Trustee

    Bankruptcy trustee is a person appointed by the United States ...
  4. Municipal Bond Fund

    A municipal bond fund is a fund that invests in municipal bonds.
  5. Bankruptcy Abuse Prevention And ...

    BAPCPA was passed by Congress and signed into law by President ...
  6. IRS Publication 908

    IRS Publication 908 explains the basic federal income tax aspects ...
Related Articles
  1. Personal Finance

    The Other Personal Bankruptcy Option: Chapter 13

    In a Chapter 13 bankruptcy, filers develop a plan to repay all or part of their "past due" debt. Any allowable debt left afterward is discharged.
  2. Taxes

    5 Myths About Personal Bankruptcy

    There are some persistent myths that hover over the process of bankruptcy that are either half-truths or completely false.
  3. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  4. Investing

    Do Municipal Bond Mutual Funds Offer a Tax Incentive?

    Learn about individual municipal securities and municipal bond funds, whose principal stability and tax-free yield appeal to high-income investors.
  5. 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.
  6. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  7. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  8. 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.
  9. 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.
RELATED FAQS
  1. Do shareholders lose all their equity once Chapter 11 bankruptcy is filed?

    Learn what happens to an investor's equity when a company files for Chapter 11 bankruptcy. Find out what happens if a company ... 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 >>
  3. How does chapter 11 bankruptcy affect a company's stocks and bonds?

    Learn more about what happens to companies that file for chapter 11 bankruptcy protection - and how it differs from other ... Read Answer >>
Trading Center