How is a municipal bankruptcy declared?

In Washington, declaring a municipal bankruptcy is a rigorous process. It requires a municipality to meet three criteria established in state law. First, the municipality needs to show that it is insolvent, meaning it does not have enough financial resources to pay its creditors. Second, the municipality needs to demonstrate that it is unable to borrow the resources needed to pay its obligations. Lastly, the municipality must prove that it has exhausted all available measures for resolving the financial crisis. Once these criteria have been met, a municipality must petition the state court in which it is located for permission to declare bankruptcy. The petition process includes providing the court with a detailed financial analysis, a proposed plan for restructuring the municipality’s debt, and an action plan for resolving the long-term damage the bankruptcy would cause. If the court decides that a municipal bankruptcy is necessary, it will issue an order allowing the municipality to proceed with its restructuring process. This order will also designate an official to oversee the process. The official will be responsible for making sure that the municipality meets the requirements of its restructuring plan. This official will also serve as a mediator between the government and creditors. Once the restructuring process is complete, the court will approve the plan and issue a discharge order. This order will terminate all of the municipality’s debts and allow it to begin operating from a financial standpoint. However, the municipality may still have to negotiate with creditors to resolve any remaining disputes.

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