Chapter 9 bankruptcy

Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assisting them in the restructuring of their debt. On July 18, 2013, Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 Bankruptcy protection. Jefferson County, Alabama, in 2011 and Orange County, California, in 1994 are also notable examples. "The term 'municipality' denotes a political subdivision or public agency or instrumentality of a State."

From 1937 to 2008 there were fewer than 600 municipal bankruptcies. As of June 2012 the total was around 640. In 2012 there were twelve chapter 9 bankruptcies in the United States, and five petitions have been filed in 2013. Since 2010, 36 petitions have been filed.

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities. The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District.

However, a revised act remedying the constitutional deficiencies was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX). This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.

Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis. The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.

In 1988, Chapter 9 was amended by Congress to provide statutory protection from § 552(a) lien stripping provisions to revenue bonds issued by municipalities. This was addressed with the classification of these bonds as "special revenues" under the newly minted § 928(a) and § 922(d) exemption of special revenues from the automatic stay provisions of § 362.

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