MUNICIPAL BANKRUPTCY (Page
The purpose of chapter 9 is to provide a
financially-distressed municipality protection from its creditors
while it develops and negotiates a plan for adjusting its debts.
Reorganization of the debts of a municipality is typically
accomplished either by extending debt maturities, reducing the
amount of principal or interest, or refinancing the debt by
obtaining a new loan.
Although similar to other chapters in some
respects, chapter 9 is significantly different in that there is no
provision in the law for liquidation of the assets of the
municipality and distribution of the proceeds to creditors. Such a
liquidation or dissolution would undoubtedly violate the Tenth
Amendment to the Constitution and the reservation to the states of
sovereignty over their internal affairs. Indeed, due to the severe
limitations placed upon the power of the bankruptcy court in
chapter 9 cases (required by the Tenth Amendment and the Supreme
Courtís decisions in cases upholding municipal bankruptcy
legislation), the bankruptcy court generally is not as active in
managing a municipal bankruptcy case as it is in corporate
reorganizations under chapter 11.