When you are going to be filing bankruptcy, there are several different types from which you can choose. One of the kinds of bankruptcy is called Chapter 9, and this is municipal bankruptcy.
This began in 1934 during the great depression. This was enacted so that municipalities could file for bankruptcy in the same way that individuals and businesses could. The purpose of filing for Chapter 9 bankruptcy is that it will provide a municipality that is financial distressed with protection from the creditors, and allow it to develop further and figure out a way to clear its debts. In the same way that other bankruptcies work, when a municipality has filed for Chapter 9, their assets will be reorganized in order to pay back as much of their debt as possible. With this type, this means that either the old debts will be extended in the interest of the debt maturities and that the creditors will still get their money, just at a later time. Sometimes, it also means that the interest or principal on the debts can be reduced. Other times, it means that the debt can be refinanced by getting a new loan that will cover all of the old ones.
The thing that is different about Chapter 9 is that there will be nothing in the bankruptcy filings that say that the assets of the municipality have to be sold or liquidated in order to pay off the debts. This makes it very easy for a municipality to file for bankruptcy and figure out a way to get out of debt without having the legal issues regarding differences between states and their internal affairs that should not be regulated by the government.
A person or a business cannot file for Chapter 9. Only a municipality can, which is defined under the code as “a political subdivision or public agents or part of a state.” This includes cities, counties, school districts, towns, and even public improvement districts. Also included under this definition would be bodies that produce revenue, such as bridge authorities, or authorities that deal with highways or gas. When filing for Chapter 9 it is very important that you fit this definition because the specifics of Chapter 9 are meant only to provide this surface to a municipality, and not to just an individual or a business who is going through bankruptcy. It is designed to keep the country running as well as possible.