Taken from the US Courts official website, the . . . → Read More: Eligibility for Filing Chapter 9 Bankruptcy or Municipal Bankruptcy]]> Under the current bankruptcy law of the United States of America, a municipality is allowed to seek bankruptcy protection by filing chapter 9 bankruptcy. These municipalities that are under financial crisis can be protected from their creditors while coming up with a plan for the reorganization of their debts.

Taken from the US Courts official website, the term “municipality” is defined in the Bankruptcy Code as a “political subdivision or public agency or instrumentality of a State”. 11 U.S.C. § 101(40). This includes cities, counties, public improvement districts, school districts and townships. It also includes revenue-producing bodies like highway authorities and bridge authorities with services that are paid by users and not by general taxes.

There are requirements before a municipality may file chapter 9 bankruptcy. Aside from the definition of municipality mentioned above, eligible municipalities filing chapter 9 bankruptcy should also establish the following additional eligibility requirements under Section 109(c) of the Bankruptcy Code:

1. the municipality must be specifically authorized to be a debtor by State law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor;

2. the municipality must be insolvent, as defined in 11 U.S.C. § 101(32)(C);

3. the municipality must desire to effect a plan to adjust its debts; and

4. the municipality must either:

• obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9;
• negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan;
• be unable to negotiate with creditors because such negotiation is impracticable; or
• reasonably believe that a creditor may attempt to obtain a preference

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