Chapter 9 Bankruptcy

Definition - What does Chapter 9 Bankruptcy mean?

Chapter 9 bankruptcy refers to the chapter of the bankruptcy code that protects a debt-ridden municipality (such as a city or a county) from its creditor(s) while the municipality reorganizes its debt and negotiates a debt adjustment plan with its creditors. Chapter 9 differs from other chapters of bankruptcy because a municipality’s assets cannot be liquidated to repay creditors.

Chapter 9 bankruptcy is also called municipality bankruptcy.

Justipedia explains Chapter 9 Bankruptcy

Chapter 9 bankruptcy is a bankruptcy that can be only filed by a municipality. Municipalities include towns, villages, counties, cities, school districts, municipal utilities, and taxing districts. A Chapter 9 bankruptcy allows a municipality to negotiate a debt repayment plan with its creditors while at the same time protecting the municipality from adverse actions by its creditors. Liquidating a muncipality's assets to pay off its creditors is not legally permissible. Doing so is seen as a violation of the 10th Amendment. Because a federal court cannot force a municipality to liquidate its assets, the purpose of a Chapter 9 bankruptcy is restricted to negotiating a debt repayment plan between a municipality and its creditors. The debt repayment plan may include refinancing, reduction in the principal amount of debt owing, and/or a reduction in the interest rate the municipality's creditors are charging.
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