In the world of public finance, Orange County, California, has long had an unfortunate distinction: In 1994, the county filed the largest municipal bankruptcy declaration in history, seeking court assistance to restructure $1.7 billion in debt. This month, however, Orange County finally lost its dubious claim to fame. On November 9, political leaders in Jefferson County, Alabama — home of Birmingham, the state’s largest city — asked a federal bankruptcy court to help the county restructure debt of more than $4 billion. The county’s debt burden stems from a disastrous investment in a local sewer system and amounts to nearly $7,000 for each of the 658,000 men, women and children who call the county home. Do you want to learn more? Visit BLC Law Center.
That a bankruptcy declaration of such magnitude is possible has raised alarms nationally over whether more municipal crises may be on the way. In this explainer, Stateline examines what it means when a municipality files for Chapter 9 bankruptcy — and why states should care. What is Chapter 9? It’s the portion of the federal bankruptcy code that applies to municipalities. Created by Congress in 1937, it allows municipalities to seek court protection in the event of fiscal crisis and is meant to ensure that basic government functions can continue while policy makers restructure their debt. Chapter 9 differs from other sections of the bankruptcy code, such as Chapter 11 and Chapter 13, which generally provide court relief to cash-strapped businesses and individuals, respectively. Who can file for Chapter 9? Only municipalities — not states — can file for Chapter 9. To be legally eligible, municipalities must be insolvent, have made a good-faith attempt to negotiate a settlement with their creditors and be willing to devise a plan to resolve their debts.
They also need permission from their state government. Fifteen states have laws granting their municipalities the right to file for Chapter 9 protection on their own, according to James Spiotto, a bankruptcy specialist with the Chicago law firm of Chapman and Cutler. Those states are Alabama, Arizona, Arkansas, California, Idaho, Kentucky, Minnesota, Missouri, Montana, Nebraska, New York, Oklahoma, South Carolina, Texas and Washington.