The City of Detroit is currently considering Chapter 9 bankruptcy as a means of dealing with its massive budget deficit.  The purpose of Chapter 9 is to provide a financially distressed municipality protection from its creditors, while allowing it to develop a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan. Municipalities must voluntarily seek protection under Chapter 9, and may not file a petition under any other chapter.  The municipal debtor must file a list of creditors per 11 U.S.C. § 924. Normally, the debtor files the list of creditors with the petition. The case then advances in a manner similar to a Chapter 13 (with a few quirks unique to municipalities); the Chapter 9 process is described in more detail here.

More recently, the Post-Tribune of Northwest Indiana reported in this article that Chapter 9 bankruptcy is also a hot topic in Indiana.  Indiana Gov. Mitch Daniels recently suggested that his state hould pass a municipal bankruptcy law, in light of the insolvency of cities such as Gary. Such a state law is required for any city interested in pursuing bankruptcy.  The Governor expressed hope that such a measure would not harm Indiana’s AAA credit rating, one of the best in the country.

Gov. Daniels said he still hopes Gary – Northwest Indiana’s largest city – will be able to right its financial ship by developing the Gary/Chicago International Airport or a land-based casino. He even praised Gary City Hall for slashing its tax levy by 24 percent since 2008 with the help of the Indiana Distressed Unit Appeals Board.  However, Gary’s financial situation remains dire.  As a recent Wall Street Journal explained, the problem is by no means limited to Indiana or Michigan; the economic slump is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9 as their revenue declines faster than expenses.  This, in turn, raises concerns about the safety of municipal bonds and related securities that are traditionally considered low risk.

If you are considering personal bankruptcy, your proceedings would be very different from anything that a municipality would go through.  Only a municipality may file for relief under Chapter 9.  The vast majority of individual filers apply for bankruptcy protection under eitherChapter 7 or Chapter 13.  A few high wage-earning individuals may file under Chapter 11,although that chapter is typically used only by corporations.

Drew Broaddus