Basics of Chapter 9

  • Chapter 9

Bankruptcy Basics of Chapter 9

The bad financial situation can affect not just individuals but also organizations (both government and private). However, the rules for getting a fresh start differ slightly in both cases. While consumers can opt for Chapter 7 or Chapter 13 bankruptcy to get their debts discharged, Chapter 9 bankruptcy helps municipalities (cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) reorganize their debts. This bankruptcy chapter helps protect debt-ridden municipalities from creditors, while a reorganization plan is being developed for adjusting their debts. Reorganization mainly takes place by extension of debt maturities, reduction of the principal or interest amount or by getting the debt refinanced by taking out a new loan.

Though it may seem similar to other bankruptcy chapters, lawyers of Dallas based bankruptcy firm Recovery Law group  elaborate that it is significantly different as no liquidation of assets takes place to pay off creditors in this case. Even the bankruptcy court plays a limited role in chapter 9 cases. Its role is restricted to:

 Approval of petition (in case the debtor is eligible);
 Confirmation of the debt adjustment plan;
 Ensuring that the plan is implemented
Eligibility for Chapter 9 bankruptcy

A municipality is defined as a “public agency, political subdivision, or instrument of a State.” This includes school districts, townships, counties, and even cities, apart from revenue-generating bodies like highway authorities, bridge authorities and gas authorities. Since only a “municipality” can file under Chapter 9 from financial relief, it is important that they consult the opinion of bankruptcy lawyers by calling 888-297-6023 to discuss particulars of their case. The additional eligibility requirements for a Chapter 9 bankruptcy case include:

1. The municipality must be specifically authorized to be a debtor by either a State law or a government officer or organization empowered by State law’
2. The municipality must be insolvent;
3. A municipality must desire to plan to adjust its debts;
4. The municipality must either:

a. Obtain creditors’ agreement holding at least a majority in number of claims of each class that the debtor intends to impair under a plan under chapter 9;
b. Negotiates in good faith with creditors and fails to obtain the agreement of creditors holding at least a majority in number of claims of each class which debtor intends to impair under the plan;
c. Be unable to negotiate with creditors as such negotiation is not practical; or
d. Believe reasonably that a creditor might get a preference.

What happens during Chapter 9 bankruptcy?

Municipalities need to seek protection under Chapter 9 of the Bankruptcy Code. They also need to file a list of creditors. Though the debtor should provide the creditors’ list at the time of filing, in this case, bankruptcy court allows the option to provide it at a different time. The case is not assigned automatically to any judge to avoid any political interference in the case of Chapter 9 bankruptcy. A notice of commencement of the case and the order for relief is essential. This notice is published at least once a week for three consecutive weeks in a newspaper having general circulation in the district where the case begins as well as in other newspapers which are generally used by bond dealers and bondholders. The newspapers in which notice and additional notice is published and who gives or receives notice by mail is a prerogative of the court.

The bankruptcy court also allows objections to the petition including –
 Whether negotiations were conducted in good faith,
 Whether the state has authorized a municipality to file,
 Whether the petition is filed in good faith.

In case an objection is filed against the petition, a hearing on the objection is held by the court. In case the petition is not filed in good faith or does not meet the requirements of Chapter 9, it can be dismissed by the court. If the petition is not dismissed on any objections, Bankruptcy Court needs to order relief and allows the case to proceed under Chapter 9.
Just like other bankruptcy cases, an automatic stay is applicable in this case too. In fact, additional automatic stay provisions prohibit any action taken against officers and inhabitants of the debtor if they seek to enforce a claim against the debtor. The stay refrains a creditor from bringing a mandamus action against any officer of the municipality; against an inhabitant of the debtor to enforce a lien on or arising out of taxes owed to the debtor.

A proof of claim or interest needs to be filed within the stipulated time frame. It is considered filed in case of Chapter 9 if it appears on the list of creditors filed by the debtor. In case it appears disputed, contingent, or unliquidated, then a creditor needs to file a proof of claim. The court, according to Bankruptcy Code Sections 903 and 904, the court has limited power over operations of the debtor. It cannot interfere with political powers, property or revenues of the debtor as well as the debtor’s use of its property and revenues.
The role of the trustee is limited. They do not preside over a meeting of creditors (it is not held), cannot convert the case, do not supervise the administration of the case, and do not monitor financial operations of the debtor too. The role of creditors is also limited in this case, since there is no meeting of creditors. They can, however, choose and authorize attorneys and accountants to represent the committee, consult with debtors regarding the administration of the case, investigate the conduct, asset, liabilities and financial condition of the debtor and formulate a plan for the cumulative interest of all creditors.

Discharge in chapter 9
A plan for adjustment of debts must be filed by the municipality to adjust their debts. The plan is confirmed if it meets the statutory requirements. A discharge is available for municipal debtor on confirmation of debt adjustment plan; a deposit made by the debtor is distributed as per the plan by disbursing agent appointed by court and determination by the court that securities deposited constitute valid legal obligations of the debtor. Exceptions to the case also exist for –
 Any debt excepted from discharge by plan or order confirming the plan;
 Any debt owed to an entity before confirmation of the plan, who had no notice or knowledge of the case.