Chapter 9 and the Detroit’s Bankruptcy

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Today, we will learn more about:

1. Chapter 9 Bankruptcy

2. Detroit’s Bankruptcy

What is a Chapter 9 Bankruptcy?

Chapter 9 bankruptcies are a unique type of bankruptcy that provides for the reorganization of financially-distressed municipalities. Depending on state legislation, these municipalities may include public entities such as cities, towns, school districts, and public hospitals. However, states themselves cannot file for bankruptcy. Chapter 9 bankruptcies help protect municipalities from creditors and allow them to address their debts fairly. They are much less common than both Chapter 7 and Chapter 11 bankruptcies, with fewer than 1,000 total filings in the history of the United States.

History

While the term "Chapter 9 Bankruptcy" was not used until the creation of the Bankruptcy Code in 1978, legislation enacted in 1934 represented the first attempt by Congress to establish a federal framework for municipal debt relief. This was necessary as many municipalities were struggling to stay afloat during the Great Depression. Before this legislation, there was no specific federal law regarding municipal bankruptcies. Municipalities in financial distress had to rely on state legislation, which was difficult due to a lack of clear and constant guidelines.

The 1934 legislation authorized municipal bankruptcies but was shortly overturned and held unconstitutional by the Supreme Court in 1936. The Court found that the law violated the Tenth Amendment of the U.S. Constitution, which reserves powers not granted to the federal government to the states. It reasoned that bankruptcy was a power reserved to the states and that the legislation was unconstitutional because it authorized a federal court to approve a plan of adjustment without regard for state law.

In 1937, Congress passed a new Municipal Bankruptcy Act, which reserved more power for the states and established a new legal framework for municipal bankruptcies. While this law has been modified and expanded over the past century, it continues to serve as the foundation for Chapter 9 Bankruptcies today.

Eligibility

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