Bankruptcy

State-sanctioned Federal Bankruptcy

By Katie Porter

If Credit Slips had a category for "Beyond the Comfort Zone," I'd put this blog post here. But I'm curious about the pending California legislation, Assembly Bill 155, that would restrict municipal (Chapter 9) bankruptcy filings. The bill would require municipalities to obtain approval from the state-run California Debt and Investment Advisory Commission before filing bankruptcy. The political story is easy; this is the fall-out of the bankruptcy of Vallejo, CA last year. Among other concerns, unions whose members had their pay or benefits reduced want to restrict access of local governments to chapter 9. Cash-strapped cities, facing a double-whammy of lower taxes and higher claims on social services, feel differently.

Now my bankruptcy teacher was pretty decent but I never learned that the Bankruptcy Code gives states the power to limit their municipalities' ability to file a chapter 9 case. But it's right there in 11 USC 109(c)(2). (Of course, this means that I also didn't know that municipalities must be "insolvent" to file chapter 9, a requirement that is notably absent for debtors in other chapters.) Apparently, states take a variety of approaches to this--some prohibiting chapter 9, some remaining silent leaving things unclear, and some conditioning chapter 9 on some thing, as California's proposed legislation would do. I'm  struck by the remarkably different approach in chapter 9 than in chapter 11, where the doors are really wide open to bankruptcy relief. Are the public harms that different? The bankruptcy of a company, including the rewriting of its union contracts and the devaluation/cancellation of its stock, can have similar harms on communities. I'd be very grateful to Credit Slips readers who will share their thoughts about these issues; I have a feeling the future will bring more chapter 9 filings.

Full post as published by Credit Slips on August 27, 2010 (boomark / email).