How is a municipal bankruptcy declared?

In Virginia, a municipality can declare bankruptcy if it agrees to meet certain criteria. Typically, the municipality will be in a state of financial distress and unable to pay their creditors. The municipality then must file for bankruptcy protection through a process known as a Chapter 9 filing. This filing will allow the municipality to reorganize their finances and manage their debt. The bankruptcy filing must be initiated by the city council, or by the mayor if a council is not present. The filing must be approved by the council, or if the council is not present, by the mayor. In addition, the filing must have the support of the governing body of the affected municipality, usually a majority vote. Once the filing is approved, the municipality will have the opportunity to negotiate with its creditors and create a plan to repay its debts. The plan is overseen by a court-appointed trustee who will help the municipality develop a plan to become financially viable and efficient. Municipal bankruptcies are an extreme measure that should only be taken when all other options have been exhausted. It is an arduous process that requires a great deal of cooperation and consultation among all of the interested parties. While a municipal bankruptcy filing can lead to the reorganization of a municipality’s finances, it can also be extremely detrimental to the municipality’s reputation and credit rating.

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