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Simple English definitions for legal terms
Chapter 9 bankruptcy
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A quick definition of Chapter 9 bankruptcy:
Chapter 9 bankruptcy is a legal way for cities, counties, school districts, and other public bodies to fix their money problems. It lets them make a plan to pay back their debts and keep providing important services to their residents. Only public bodies can use Chapter 9, and they have to meet certain requirements to be eligible. Once they qualify, they have more power than a company in bankruptcy. They can make their own plan to pay back their debts, and creditors can't interfere. The court can't tell them how to run their government or use their money.A more thorough explanation:
Chapter 9 bankruptcy is a legal remedy for insolvent municipalities to address their fiscal shortcomings through a reorganization plan. This provision allows municipalities to adjust their debts through an adjustment plan to "foster the continuance of municipalities rather than their dissolution."
Only municipalities may file bankruptcy under chapter 9, and no other chapter is available to municipalities. The definition of "municipalities" is relatively broad enough to include cities, counties, townships, school districts, and public improvement districts.
Chapter 9 is modeled after chapter 11, which protects a municipality from creditors, much like a commercial debtor receives protection in a chapter 11 case. In both proceedings, debtors enjoy an automatic stay. This provision protects debtors from creditors bringing any action against the municipality and grants debtors a "breathing spell" for negotiations on debt readjustment.
Chapter 9 differs from chapter 11 in several important respects. Chapter 9 requires municipalities to qualify for chapter 9 protections through eligibility requirements that go beyond those prescribed in chapters 11 and 7. A debtor under chapter 9 must meet five conditions to be eligible.
Once these threshold prerequisites are met, and the filing is approved, a municipality has more power than a corporate debtor in a chapter 11 case. This power is derivative of federalism concerns embodied in the Tenth Amendment, which forbids the federal government from interfering with the sovereign powers of the states, including the states' powers over their localities.
For example, under chapter 9, a municipality has exclusive rights to submit debt readjustment plans for confirmation; the exclusivity period is not limited in time, as in chapter 11. Creditors are barred from submitting plans of their own, even if there is a prolonged delay caused by the municipality.
Moreover, a trustee is generally not permitted to be appointed for the locality. The municipality continues its operations as a going concern with the same leadership, even if the leadership may impair the creditors' interests. The operations of the municipality are left to the local leaders' complete discretion.
Overall, chapter 9 bankruptcy provides a legal remedy for insolvent municipalities to address their fiscal shortcomings through a reorganization plan, allowing them to adjust their debts and continue providing essential services to their residents.