Most people would answer the question: “Who can file bankruptcy?” with “people and companies.” While those answers are correct, did you know that cities can also file for bankruptcy?
Under Chapter 9, a previously underutilized section of the bankruptcy code that is becoming more popular in recent years, any municipality can file for bankruptcy protection.
In 2011-2013, 4 cities in the US filed for Chapter 9 including, most famously, Detroit.
Because of the lack of previous filings, this area of law is typically practiced by lawyers who work on large corporations’ Chapter 11 cases. Therefore, in some ways, Chapter 9 cases look like large Chapter 11 cases.
However there are some significant differences between the two chapters. For example, in Chapter 11 a company can sell off some or all of its assets. It can simply cease to exist, and it can be relieved of its obligation to pay certain creditors due to agreements made in the Chapter 11 Process.
Contrast that with a city filing for Chapter 9. A city can’t simply stop existing, not can it sell off certain neighborhoods, or stop paying police officers or firemen. Any of those actions would result in severe consequences that the broader bankruptcy system would like to avoid.
As such, Chapter 9 has been specially crafted to achieve some the goals of bankruptcy like rehabilitation without allowing some of the “tricks of the trade” used under other chapters.
If you live(d) and/or work(ed) in/for a city that is going bankrupt under Chapter 9 it would be in your best interest to talk to a qualified bankruptcy attorney in order to protect your interests.