2-Minute Law School: Municipal Bankruptcies

Hi. Professor Albert here for this week’s edition of THELAW.TV’s 2-Minute Law School. This week, we’re going to discuss municipal bankruptcies and their effect on the general population.

Bankruptcy is a legal status of a person or organization who cannot repay the debts they owe to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Bankruptcy laws help people who can no longer pay their creditors get a fresh start by liquidating assets to pay their debts … or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.

Over the past few months, the State of California has been hit with a rash of counties filing for Chapter 9 bankruptcy. Chapter 9 bankruptcy, under the United States Bankruptcy Code, is available exclusively to municipalities and assists them in the restructuring of debts. You might ask: how a city or county can actually go bankrupt. Due to economic downturns and failing businesses, coupled with a contractual agreement to pay out pensions and benefits to municipal employees, a city or county can accrue a large debt and be forced to file for Chapter 9 bankruptcy. They can usually borrow money by issuing securities, and government bonds, but, in some instances, a city or county may not be able to borrow money at all.

Since 2010, there have been 31 municipal bankruptcy filings in the United States. In June 2012, Stockton, California became the largest U.S. city to file for bankruptcy. San Bernardino filed for bankruptcy after learning the city only had one hundred fifty thousand dollars in its bank accounts. Harrisburg, Pennsylvania and Boise County, Idaho both filed for bankruptcy and had their claims rejected. Michigan governor Rick Snyder has also declared a financial emergency for the city of Allen Park.

When a municipality is bankrupt, it can cut costs, which in turn leads to fewer services like garbage collection, firefighting crews, police forces, public libraries, and more. A municipality can also increase its revenue by raising taxes. In most cases, a municipality does both. When costs are cut, it usually leads to a reduction in size, scope, and quality of services provided. In the instance of the city of San Bernardino, California’s most recent bankruptcy filing, public safety agencies account for 75 percent of the city’s budget.

If you have questions about the bankruptcy law, watch hundreds of local attorneys answer thousands of legal questions on video, or consult with one of the featured lawyers. Online at THELAW.TV.