Chapter 9 of the US Bankruptcy Code helps municipalities settle debts, protecting them from lawsuits and judgments. Eligible municipalities include counties and school districts controlled by the state. Bankruptcy courts have limited power and cannot interfere with a municipality’s property or income. Creditors are restricted and cannot offer competing plans. The bankruptcy court’s role is to hear motions, approve debt settlement plans, and confirm implementation.
Title 11 and Chapter 9 of the United States Bankruptcy Code are used by municipalities to file for bankruptcy. Chapter 9 is a federal government scheme to help municipalities settle their debts and has been amended several times in an effort to avoid violating states’ sovereign rights. Under Chapter 9, municipalities are protected from lawsuits and judgments are awarded to creditors in order to negotiate settlement of debts. Eligible municipalities are broad in scope and can include counties and school districts, as long as they are controlled by the state. Bankruptcy courts have limited power in handling Chapter 9 cases. They cannot interfere with a municipality’s rights to use its property, and they cannot interfere with its income.
Chapter 9 differs from other bankruptcy provisions because municipalities are often protected by law from liquidating their assets and distributing the proceeds to creditors. Federal bankruptcy courts have many more restrictions and limitations due to the Tenth Amendment to the United States Constitution, which prohibits federal infringement of state sovereignty. If a federal bankruptcy court were to force municipalities to liquidate their assets, then it could be seen as a violation of the 10th amendment. This is the same reason that bankruptcy courts are often barred from dissolving municipalities as a resolution of a Chapter 9 filing. The three jobs of a bankruptcy court in these cases are often to hear the city’s motion, approve a plan for the debt settlement and confirm that the plan has been implemented.
Municipalities can start a lawsuit by filing a petition under the Bankruptcy Code. They are also often required to submit a list of creditors and required details about the debt with the filing or at another time as directed by the bankruptcy court. The chief judge of the appellate court will often assign a bankruptcy judge to the case once the petition has been filed. In other bankruptcy cases, the registrar is responsible for allocating cases. The clerk often remains responsible for giving creditors and others notice of the Chapter 9 filing, which includes placing a notice in the local newspaper for a prescribed amount of time.
Creditors are often more restricted in a Chapter 9 bankruptcy than in other bankruptcy documents. For example, creditors are not allowed to offer plans that compete with what Council is proposing. The municipal plan is often forced upon creditors, even if they disagree with it. The bankruptcy court cannot interfere with the operations of the municipality during the bankruptcy proceedings.
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