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The challenges of Chapter 9 filings for creditors

There has been a great deal of coverage in the media concerning the city of Detroit’s filing for Chapter 9 bankruptcy. Whether this filing will still go forward is yet to be determined. However, one federal judge has already ordered that state’s governor to withdraw the filing because of pensioner concerns.

There are 15 states in the nation including California that permit municipalities to file for Chapter 9 bankruptcy. But though this process is allowed, municipalities must comply with federal requirements before the allowing of the Chapter 9 filing can go forward. Besides being insolvent, municipalities must also make a good faith attempt to settle their debts with creditors. There also must be a plan in place that maps out how these debts are to be resolved.

Obviously such a plan will need to be approved by the court. Creditors will also wish to have their attorneys or representatives in the center of the negotiation because, obviously, a great deal of debt and money could be at stake.

Municipalities filing for Chapter 9 bankruptcy are extremely rare, though we are hearing about his on a more frequent basis. Chapter 11 filings involving businesses seeking bankruptcy protection is much more common. Unfortunately, however, creditors do not have as much leverage in a Chapter 9 filing as they would have in Chapter 7, 11 or 13 filings.

Since we have seen such filings occurring in the State of California, creditors will certainly wish to address any Chapter 9 concerns to attorneys that understand creditors’ rights and how the collection process operates. These attorneys can represent these clients and make sure that any plan approved by the court is fair for those businesses owed money by the municipality.


Source: The News-Herald, “Municipal bankruptcy explained: What it means to file for Chapter 9,” John Gramlich, July 24, 2013