When filing for chapter 9 bankruptcy, there are a few important facts to remember. Like similar bankruptcies, chapter 9 is used as a way to protect assets and halt accumulating debt. Entities that file for chapter 9 bankruptcy usually have a plan in place for the outcome. Before going all in on this bankruptcy code, consider how effective it will be if successful.
What is Chapter 9 Bankruptcy?
Chapter 9 bankruptcy was set up for municipalities that want to reorganize debt. Due to the taxes and paperwork involved, a specific filing was needed to cover cities and towns. But chapter 9 bankruptcy goes beyond those two municipalities by covering school districts, counties and other taxing districts. By meeting four specific requirements, chapter 9 becomes an option for most municipalities.
Before Filing
Municipalities are required to be insolvent, have a desire to adjust debts, and be authorized by the state to file for chapter 9. Finally, there must be an agreement of the majority for specific creditors in the group. This is to ensure that an attempt was made to resolve the debt before moving forward with chapter 9. Even when meeting all of these requirements, there are situations where filing will still be denied.
The Judge
With chapter 9 bankruptcy, the chief judge of the court of appeals is in charge of choosing the judge that will handle the case. This is different from regular bankruptcy filings where the judge is chosen at random. The biggest takeaway from this is the amount of politics involved with coming to a final decision. A lot of the case will be localized, and that will lead to familiar faces meeting up.
The chief judge will have a pick of judges from the local bankruptcy court – once again, this adds to the overall tone of the case.
Automatic Stay
One of the major benefits of filing for chapter 9 is the automatic stay. It freezes any attempt to collect on debts against the municipality. Depending on the location in question, it can also protect the officials associated with the municipality. This is why timing means everything with the initial filing. Meeting requirements are only one of the priorities of a successful chapter 9 bankruptcy.
COVID-19
Since 2020, the biggest question around bankruptcy was its association with COVID-19. More municipalities than ever are filing for chapter 9 due to covid. But the most notable of these filings are coming from school districts that are having troubles with the adjustment. Chapter 9 offers temporary relief, and a better way of moving forward without crushing debt. Many of the post COVID-19 chapter 9 bankruptcy plans have had success with reorganizing their debt. A few have reopened and improved their vision to meet modern demands. Even if the plan is to delay for refinancing, it is an important way to reduce full closure of municipalities.
Wrap Up
There are more than a handful of notable cases where chapter 9 bankruptcy set a precedent. Since 1937, it has played a major role for multiple municipalities. Getting out of debt is hard, but this is a proven way to right the ship.
