What happens when a city declares bankruptcy? A city can file for bankruptcy under Chapter 9 of the Federal Bankruptcy Code of the United States. However, the state has to authorize the filing. For example, the city of Atlanta can not file for bankruptcy unless it is approved by the state of Georgia. There are basically three things that happen when a local government declares bankruptcy.
The state will appoint a board or a trustee to execute a reorganization plan. The municipality will also design a readjustment plan. The municipality will also have to prepare for lawsuits.
First, the state will appoint a board or a trustee to oversee the cities finances. It is rare to find out that a municipality will have to file for bankruptcy in the United States. The board or trustee will pay creditors and other parties based on a judicial decision by a court. For example, if the city owes $30 million dollars to vendors, each vendor might receive fifty cents for every dollar that is owed to them. The board or trustee will also remove city officials and employees and bring in a new management team. The new management team will find out what assets can be sold to pay off creditors.
The municipality will develop a readjustment plan. A municipality may announce that it is declaring bankruptcy so that creditors can help them. Sometimes creditors will help and sometimes they are not willing to help. The readjustment plan is a way to inform creditors that the city is trying to repay its debt obligations. In a readjustment plan, the debt obligations are restructured so that the municipality can provide necessary services to its citizens. The city may stop providing some services. Taxpayers may get trash pick up once a month instead of every week. The local library may open three days out of the week. The state may have to approve the city’s readjustment plan.
This is important because when a city declares bankruptcy it can affect thousands of people. For example, there may be losses for investors and layoffs for employees. In some cases, former employees may not receive their monthly pension. These are some of the things that happen when a government declares bankruptcy. Also, the city may have to borrow money and the interest rate will be higher.
When a municipal declares bankruptcy, there will be lawsuits almost all the time. The lawsuits are filed for various reasons. Creditor(s) may feel that they are not getting a fair share and that the city can use other resources to pay its bills. On the other hand, lawyers file lawsuits because former city workers have a right to the money that is promised to them after they retire. Creditors will go after the city’s property. However, in some municipality bankruptcies, the cities may be able to keep control of its finances and properties. Keep in mind that state statues have a big impact on municipal bankruptcy filings.
Of course, bankruptcy is never private. There will be news reports, television reports and many Tweets when a municipality decides to file for bankruptcy.